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

Imogen

Business

30 June, 19:14

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) ?

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Answers (1)

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Cindy Shepard · Answer 1

Here Osbourne has two options, either it wait for two days or it can withdraw as soon as possible by sending its employee. So will assess both options by Cost Benefit analysis.

Explanation:

Withdraw as soon as possible

The cost of sending the employee is ($500)

We can save 8% on 5 Million deposit to our account

(8% per annum * (2days / 365) * $5 million $2192

Net Savings $1692

Waiting Option

The only cost saving in this case is $500 and loss is $2192 and net cost to the firm is ($1692).

So the option to withdraw amount as soon as possible is the financially best option here. But we must consider the threat of robbery which is very high. It depends upon the security arrangement which costs below $1692 and is quite enough to restrain robbery.