Question:
A firm is evaluating whether to establish a concentration banking system. The bank will charge $5,000 per year for maintenance and transfer fees. The firm estimates that the float will be reduced by two days if the concentration banking is put into place. Assuming that average daily receipts are $115,000 and short-term interest rates are 4%, what decision should the firm make regarding the concentration banking system?
1. Do not establish the concentration banking system because the net cost is $5,000.
2. Do not establish the concentration banking system because the net cost is $21,000.
3. Establish the concentration banking system because the net benefit is $115,000.
4. Establish the concentration banking system because the net benefit is $4,200