Cash management at richmond corporationrichmond corporation

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Reference no: EM13382130

Cash Management at Richmond CorporationRichmond Corporation was founded 20 years ago by its president, Daniel Richmond. The companyoriginally began as a mail-order company but has grown rapidly in recent years, in largepart due to its Web site. Because of the wide geographical dispersion of the company's customers,it currently employs a lockbox system with collection centers in San Francisco, St. Louis,Atlanta, and Boston.Steve Dennis, the company's treasurer, has been examining the current cash collectionpolicies. On average, each lockbox center handles $130,000 in payments each day. The company'scurrent policy is to invest these payments in short-term marketable securities daily at thecollection center banks. Every two weeks the investment accounts are swept, and the proceedsare wire-transferred to Richmond's headquarters in Dallas to meet the company's payroll. Theinvestment accounts each pay 0.015 percent per day, and the wire transfers cost 0.15 percent ofthe amount transferred.Steve has been approached by Third National Bank, located just outside Dallas, about thepossibility of setting up a concentration banking system for Richmond Corp. Third Nationalwill accept the lockbox centers' daily payments via automated clearinghouse (ACH) transfers inlieu of wire transfers. The ACH-transferred funds will not be available for use for one day. Oncecleared, the funds will be deposited in a short-term account, which will also yield 0.015 percentper day. Each ACH transfer will cost $700.

Daniel has asked Steve to determine which cashmanagement system will be the best for the company. Steve has asked you, his assistant, toanswer the following questions:

1. What is Richmond Corporation's total net cash fl ow from the current lockbox systemavailable to meet payroll?

2. Under the terms outlined by Third National Bank, should the company proceed with theconcentration banking system?

3. What cost of ACH transfers would make the company indifferent between the twosystems?

Reference no: EM13382130

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