No More Books Corporation has an agreement with Floyd Bank, whereby the bank handles $6.8 million in collections a day and requires a $440,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its Eastern region so that two other banks will handle its business. Banks A and B will each handle $3.4 million of collections a day, and each requires a compensating balance of $290,000. No More Books’ financial management expects that collections will be accelerated by one day if the Eastern region is divided. What is the NPV of accepting the system? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) What will be the annual net savings? Assume that the T-bill rate is 2.5 percent annually. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
Given Collections in a day = $ 6800000
Compensating balance required by the other two banks = $ 290000 each
Compensating Balance required by the Current bank = $ 440000
Given T Bill rate = 2.5%
Computation of NPV
NPV = Value of Collections in a day -( 2* Compensating balance required by 2 other banks - Compensating balance required by the current bank )
= $ 6800000 - ( 2*$ 290000-$ 440000)
= $ 6800000- ( $ 580000-$ 440000)
= $ 6800000-$ 140000
= $6660000
Hence NPV of accepting the system is $ 66,60000
Computation of Annual net savings
Annual Net savings = NPV * T Bill rate
= $ 6660000*2.5%
= $ 166500
Hence Annual net savings are $ 166500.
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