Best writers. Best papers. Let professionals take care of your academic papers

Order a similar paper and get 15% discount on your first order with us
Use the following coupon "FIRST15"
ORDER NOW

The cash manager of Bronco , inc. is contemplating the choice between using a wire transfer and an EDT.

/in /by

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 10 percent. The banks ECR is currently 7 percent and reserve requirement is 10 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 $.75. Further, assume that the transfer will occur during the middle of the week.

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?

a)

TBAL = Incremental Cost / DS * (k – ecr(1 – rr )) / 365

DS = Number of days saved

k = Firm’s investment opportunity rate

ecr = Bank’s earnings credit rate

rr = Required reserve rate

Incremental Cost = 20.00 – 0.75 = $19.25

TBAL = $20.00 – $0.75 / 1 * (10% – 0% (1 – 10% )) / 365

            = 19.25/ 1 * (10% – 0% (1 – 10% )) / 365

            = 78,069

Note: In this case, ecr is not relevant (and hence = 0) since the actual balances exceed the required compensating balances.

b)

TBAL = Incremental Cost / DS * (k – ecr(1 – rr )) / 365

DS = Number of days saved

k = Firm’s investment opportunity rate

ecr = Bank’s earnings credit rate

rr = Required reserve rate

Incremental Cost = 20.00 – 0.75 = $19.25

TBAL = $20.00 – $0.75 / 1 * (10% – 7% (1 – 10% )) / 365

            = 19.25/ 1 * (10% – 7% (1 – 10% )) / 365

            = 2,60,231

The balance transferred is larger because BRONCO is losing the benefit of the bank’s ECR.

c) Difference in parts (a) and (b) The difference in the answers above is because in part (a) the company transferred excess balances and did not lose bank ECR rate on the funds transferred, whereas in part (b) the ECR was lost, so the transfer balance had to be larger in order to break even

 
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"