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Concentration Banking

Treemont Shops operates in Naples, Florida. The firm distributes speciality gardening supplies nationwide. The firm currently uses a centralized billing system. Treemont has annual credit sales of $362 million. Lasdon National Bank has presented an offer to operate a concentration-banking system for the company. Treemont already has an established line of credit with Lasdon. The bank says it will operate the system on a flat-fee basis of $175,000 per year. The analysis done by the bank's cash management services division suggests that 3 days in mail float and 1 day in processing float can be eliminated. Because Treemont borrows almost continuously, the value of the float reduction would be applied against the line of credit. The borrowing rate on the line of credit is set at an annual rate of 7 percent. Furthermore, because of the reduction in clerical help, the new system will save the firm $57,500 in processing costs. Treemont uses a 365-day year in analyses of this sort. Should Treemont's management accept the bank's offer to install the new system?

Solution Preview

We have to do a cost benefit analysis.
The cost is $ 175000 per year

The benefit is:
=Saving in the interest cost + Saving in the processing costs
= 277699+57000

A. Saving in the interest ...

Solution Summary

This solution conducts a cost benefit analysis on Treemont Shops by calculating the benefit, savings in interest cost, and net savings.