Question

Knob, Inc., is a nationwide distributor of furniture hardware. The company now uses a central billing system for credit sales of $234.00 million annually. First National, Knob’s principal bank, offers to establish a new concentration banking system for a flat fee of $250,000 per year. The bank estimates that mailing and collection time can be reduced by two days. Assume a 360-day year.

a. By how much will Knob’s cash balances be increased under the new system? (Enter your answer in dollars not in millions.)

Increase in cash balance $

b. Assume that the borrowing rate is 12%. How much extra interest income will the new system generate if the extra funds are used to reduce borrowing under Knob’s line of credit with First National? (Enter your answer in dollars not in millions.) Interest savings $

c. Calculate the total annual cost of the old system if collection costs under the old system are $55,000 per year? (Enter your answer in dollars not in millions.) Annual cost of old system $

d. Should Knob accept First National's offer? No Yes

Answer 1

Solution a	Annual Sale	$      234,000,000
	Collection time reduced in days	2
	Extra cash released due to this=	234000000*2/360
	Extra cash released due to this=	$          1,300,000
Solution b	Interest rate	12%
	Interest savings	1300000*12%
	Interest savings	$             156,000
Solution c	Interest cost	$             156,000
	Collection cost	$               55,000
	Total cost of old system	$             211,000
Solution d	Total cost of old system	$             211,000
	Cost of new system	$             250,000
	Since cost of new system is higher than the old system,
	new system should not be implemented.