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2. Analyzing and revising the cash concentration system. ASSUMPTIONS Bank FEE $0.00 Bank service charge for weekly DTC transactions, SC $10.00 Average collected balance, ACB $15,000 Bank's earnings credit rate, ecr 4.5% Required reserve rate, rr 10% Firm's annual investment opportunity rate, k 10% a.) Calculating the total cost of the current cash concentration system Total Cost = FEE + ( k * (ACB - ((SC - FEE) / ((1 - rr) * (ecr )))) Total Cost = 0 + (0.10 / 52) * (15,000 - ((10.00 - 0) / ((1 - 0.10) * (0.045 /52)))) Total Cost = $4.15 Note: ecr must be expressed on a weekly basis. Required Collected Balance (RCB) = (SC - FEE) / ecr (1 - rr) = $12,840
Weekly opportunity cost = (0.10 / 52) * (15,000 - 12,840) = $4.15 b.) Revising the cash collection system using wire transfers Bank FEE $0.00 Bank service charge for weekly DTC transactions, SC $100 Average daily collected balance, ACB $0 Bank's earnings credit rate, ecr 4.5% Required reserve rate, rr 10% Firm's annual investment opportunity rate, k 10% Total Cost = FEE + (k * (ACB - RCB))
Note: if ACB < RCB, then there is no cost of excess balances since there are none. There is instead a service charge, but this can be offset by the interest earned on the difference invested in RCB - ACB. Required Collected Balance (RCB) = (SC - FEE) / (ecr / 52)(1 - rr) = $128,395 Note: ecr must be expressed on a weekly basis. versus ACB = $0.00 There is no weekly opportunity cost since RCB > ACB, and there are no excess balances to earn interest on. However, the SC can now be reduced by the dollar amount of interest that could be earned on the freed-up balances resulting from the

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