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Second city bank proposal

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Reference no: EM131179499

Varga Corporation has annual sales of $900 million. Management has determined that an average of 7 days elapses between the time customers mail their payments and when the funds are available to the firm. Second City Bank has a program whereby the float can be reduced by 3 days. The program would cost Varga $300,000 in annual fixed fees to the bank, as well as a .07% fee on the annual volume of sales. Varga will also be required to have a compensating balance of $4,000,000 at Second City Bank.

Additionally, Varga will be able to reduce labor costs in its accounting department by $250,000. Varga can earn 8 percent (pretax) on its investments.

Show computations which would indicate whether or not Varga should accept Second City Bank's proposal.

Reference no: EM131179499

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