Pronet has annual sales of $724 million from its 600 retail stores. Pronet can reduce its mail float by 2 days using wire transfers. The annual cost of the wire transfers is expected to be $105,610. If Pronet's cost of short-term funds is 9.75%, should the change to wire transfers be made? Why or why not? (Assume 365 days per year.)

Question

Quizplus · Accepted Answer

The savings from reducing the mail float can be calculated by first determining the daily sales volume, which is $724 million / 365 days = $1.98356 million per day. By reducing the mail float by 2 days, Pronet effectively frees up $3.96712 million ($1.98356 million * 2 days) of funds that would otherwise be tied up. The cost savings from this can be calculated by applying the cost of short-term funds, which is 9.75%. Thus, the annual savings are $3.96712 million * 9.75% = $386,794.20. After subtracting the annual cost of the wire transfers ($105,610), the net savings are $281,184.20. Therefore, the change to wire transfers should be made as it results in net savings.

Pronet Has Annual Sales of $724 Million from Its 600