Question

Two banks, First Fidelity Bank and First Union Bank, have offered to process Zack’s retail charge card payments. First Fidelity will process the payments for a fee of $0.30 per payment with no compensating balance required. First Union will process the payments “free of charge,” provided that Zack’s maintains a compensating balance of $5 million at the bank. Zack’s averages 125,000 payments per month from its credit card holders. The company can earn 8 percent before taxes on any available funds.

• Determine the costs for each of the payment processing proposals. Round your answers to the nearest dollar. Enter your answers in whole dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.20.

First Fidelity Bank: $    

First Union Bank: $

• Determine which of the two payment processing proposals Zack’s should accept if the objective is to minimize costs.  Type in either First Fidelity or First Union.

Hint: for this next part, set it = to the other answer and solve algebrically.

• Determine the rate of return (that is, Zack’s opportunity cost of funds) at which the costs of the two proposals would be equal.  % Round your answer to two decimal places.
• Determine the number of payments per month at which the costs of the two proposals would be equal, assuming that the processing fees and compensating balances remain constant.

Round your answer to the nearest whole number. Enter your answer in whole numbers. For example, an answer of 1.20 million should be entered as 1,200,000, not 1.20.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE