Osborne Shipbuilding Company, located in Baton Rouge, receives large remittances from its customers in New York and California. If the firm deposits these checks in its local bank, two business days are required for the checks to clear and the funds to become usable by the firm. However, if Osborne sends an employee to New York or California and presents the check for payment at the bank upon which it is drawn, the funds are available immediately to the firm. The firm can earn 8% per annum on short-term investments, and the cost of sending an employee to New York or California to present the check for payment is $500. What is the net benefit to the firm of employing this special handling technique for a $5 million check received on Tuesday? (Assume 365 days per year.)

Question

Quizplus · Accepted Answer

If the check is deposited in the local bank, it will take two business days for the funds to become usable by the firm. Therefore, the firm will earn interest for two fewer days than if it had the funds immediately available.

The amount of interest the firm can earn on the $5 million check for two days is:
$5,000,000 x 0.08 x (2/365) = $8,767.12

The cost of sending an employee to New York or California to present the check for payment is $500. Therefore, the net benefit to the firm is:
$8,767.12 - $500 = $8,267.12

Therefore, the net benefit to the firm of employing this special handling technique for a $5 million check received on Tuesday is $1,692.00.

Osborne Shipbuilding Company, Located in Baton Rouge, Receives Large Remittances