1. The cash manager of Bronco, Inc., is contemplating the choice between using a wire transfer and an EDT. She estimates that her investment opportunity rate is 8 percent. The banks ECR is currently 5 percent and the reserve requirement is 12 percent. Her bank account officer informs her that a wire transfer will cost $20 and will provide collected balances one day earlier than the EDT which cost $0.75.
A. Assume that the balances transferred are above the balances required to compensate the deposit bank for services. Calculate the minimum transfer balance required to justify the use of a wire transfer.
B. Assume that the balances transferred are below the balances required to compensate the deposit bank. Calculate the minimum transfer balance required to justify the use of a wire transfer.
C. Why are the answers in two preceding parts different?