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Lockbox/concentration banking

A business has four lockbox collection centers that average $235,00 in payments each day.
Payments are invested daily in short-term securities at the collection center banks.
Accounts are swept every two weeks and proceeds wire transferred to company HQ.
The investment accounts each pay .068% per day, and the wire transfers cost .20% of the amount transferred.

Another bank offers the following alternative deal:
Bank will accept the lockbox centers daily payments via automated clearing house (ACH) transfers instead of wire transfers.
ACH transferred funds will not be available for one day.
Once cleared, funds will be deposited in a short-term account yielding .075% per day.
Each ACH transfer will cost $200.

1. What is total net cash flow from current lockbox system?
2. Should the company accept the alternative concentration banking system?
3. What ACH transfer cost would make the company indifferent between the two systems?

Solution Preview

See the attached files.

1. The amount is collected in four lockboxes and then remitted in 2 weeks, during which period it earns interest. The net cash flow from the system would be the future value of these collections, net of wire transfer cost.
The wire transfer costs 0.20% of the amount. The amount collected each day is $235,000. The amount transferred is 235,000X (1-0.20%) = $234,530. There ...

Solution Summary

The solution explains how to evaluate between a lockbox and concentration banking.