Question

No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $3 million in collections per day and requires a $250,000 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 $1.5 million of collections per day, and each requires a compensating balance of $100,000. No More Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided.

a.	What is the NPV of accepting the system? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
b.	What will be the annual net savings? Assume that the T-bill rate is 2.4 percent annually. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Answer 1

Solution :- (A)

The details given are as follows :

Bank collections = 3,000,000

Required compensating balance = 100,000

Existing compensating balance = 250,000

New required compensating balance = 2* 100,000 = 200,000 ( Since there are two banks A AND B)

NPV = Bank collections -New compensating balance - Existing compensating balance

= $3,000,000 - $200,000 - $250,000

= $2,550,000

(B)

Annual tax savings

= NPV * Annual t bill rate

= 2,550,000 * 2.4%

= $61,200

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