Determine the annual pretax returns the firm

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Reference no: EM131336512

Wisconsin Paper Company is considering establishing a zero-balance system for its payroll account. The firm pays its employees every 2 weeks on Friday (that is, 26 pay periods per year). Currently, the firm deposits the necessary funds in the payroll account on Friday to cover the total amount of the checks written each pay period, which averages $1 million. However, the firm has found that the majority of the checks did not clear the payroll account until the following week. A typical distribution of when the checks clear the payroll account is as follows:

Day	Amount of funds Clearing Payroll Account
Friday	$ 300,000
Monday	450,000
Tuesday	150,000
Wednesday	100,000
Total	$ 1,000,000

Assume that the firm can earn 6 percent on any funds released from its payroll account using a zero-balance system.

a. Determine the annual pretax returns the firm would realize from the use of a zerobalance system for its payroll account.

b. What additional information is necessary to make a decision concerning the desirability of establishing such a system?

Reference no: EM131336512

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