Case Scenario:
Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its Web site. Because of the wide geographical dispersion of the company’s customers, it currently employees a lockbox system with collection centers in San Francisco, St. Louis, Atlanta and Boston.
Steve Dennis, the company’s treasurer, has been examining the current cash collection policies. On average each lockbox center handles $130,000 in payments each day. The company’s current policy is to invest these payments in short-term marketable securities daily at the collection center banks. Every two weeks the investment accounts are swept, and the proceeds are wire-transferred to Richmond’s headquarters in Dallas to meet the company’s payroll. The investment accounts each pay 0.015 percent per day, and the wire transfers cost 0.15 percent of the amount transferred.
Steve has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Richmond Corp. Third National will accept the lockbox centers’ daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH transfer will cost &700. Daniel has asked Steve to determine which cash management system will be the best for the company. Steve has asked you, his assistant, to answer the following questions:
Question 1. What is Richmond Corporation’s total net cash flow from the current lockbox system available to meet payroll?
Question 2. Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?
Question 3. What cost of ACH transfers would make the company indifferent between the two systems?