No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $7.0 million in collections a day and requires a $450,000 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 $3.5 million of collections a day, and each requires a compensating balance of $300,000. No More Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided.

A. NPV $6,850,000

B. $178,100

Explanation:

Bank collections = $7,000,000 per day

Required compensating balance = $300,000

Existing compensating balance = $450,000

Annual T-bill rate = 5%

NPV = bank collections – new compensating balance – existing compensating balance

= $7,000,000 – (2*$300,000 - $450,000)

=$7,000,000-($600,000-$450,000)

=$7,000,000-$150,000

= $6,850,000

The NPV shows that the company should proceed with the new system because it would allow No More Books Corporation to save money.

B.Net Savings (annually)

= NPV * Annual Interest Rate

= $6,850,000 * (0.026)

= $178,100

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