Problem:
No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.2 million in collections a day and requires a $310,000 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 $2.1 million of collections a day, and each requires a compensating balance of $160,000. No More Books' financial management expects that collections will be accelerated by one day if the eastern region is divided.
Required:
Question 1: What is the NPV of accepting the system?
Question 2: What will be the annual net savings? Assume that the T-bill rate is 2.4 percent annually.
Note: Show supporting computations in good form.