Lockbox cash Management

A companys treasurer has been examining the current cash collection policies. On average, each lockbox center handles $130,000 in payments each day. The companys current policy is to invest these payments in short term marketable securities daily at the collection center banks. Every two weeks the investment accounts are swept, and the proceeds are wire-transferred to headquarters in Dallas to meet payroll. The investment accounts each pay 0.015 percent per day, and the wire transfers cost 0.15 percent of the amount transferred.

The treasurer has been approached by Third National Bank about the possibility of setting up a concentration banking system for the company. Third National will accept the lockbox centers daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH-transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will also yield o.015 percent per day. Each ACH transfer will cost $700. The treasurer has been asked to determine which cash management system will be the best for the company. The following questions need to be answered.

1. What is the total net cash flow from the current lockbox system available to meet payroll?

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

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