Marlin Inc. has annual sales of $600 million. Management has determined that an average of 6 days elapses between the time customers mail their payments and when the funds are available to the firm. Third National Bank has a program whereby the float can be reduced by 4 days. The program would cost Marlin $200,000 in annual fixed fees to the bank, as well as a .02% fee on the annual volume of sales. Marlin will also be required to have a compensating balance of $3,000,000 at Third National Bank.
Additionally, Marlin will be able to reduce labor costs in its accounting department by $250,000. Marlin can earn 10 percent (pretax) on its investments.
Show computations which would indicate whether or not Marlinshould accept Third National Bank’s proposal.
Cost Already Inccured by Marlin Inc. with out this proposal is
Opportunity Cost of Money due to lag in payment for 6 days = 600000000*6/365*10% = 986301.4
Cost If the Marlin accepts the proposal
Opportunity Cost of Money due to lag in payment for 2 days = 600000000*0.1*2/365 = 328767.1
Annual Fixed fees = 200000
Fees on percentage Basis = 600000000*0.02% = 120000
Cost of compensating Balance needs to maintain in third bank is = 3000000*10% = 300000
Less:- Reduction in accounting cost due to this proposal = 250000
TOTAL = 698767.1
So It is beneficial to accept the proposal
Get Answers For Free
Most questions answered within 1 hours.