Your cash manager is currently using wire transfer to obtain collections from distant locations each time that the cash accumulates to $50,000.Evaluate the financial logic of this policy if the wire transfer costs $20, saves three days of mail time, and interest rates average 7 percent annually.

Question

Quizplus · Accepted Answer

The cost of the wire transfer is $20, and it saves three days of mail time, which means the company can earn more interest during those three days. Assuming the interest rates average 7% annually, the interest earned during those three days is 3 days x (7%/365) x $50,000 = $28.77. Therefore, the current policy should be improved by reducing the transfer amount to $34,800, which is the break-even wire transfer point. At this transfer amount, the company will not lose money on the wire transfer cost. Therefore, option D is the best choice.

Your Cash Manager Is Currently Using Wire Transfer to Obtain