Agatha Concrete Company has been offered by its bank to manage its cash at a cost of $35,000 per year. Under the proposed cash management, the firm can reduce the cash required on hand by $180,000
Since the bank is also doing a lot of record keeping, the firm's administrative cost would decrease by $2,000 per month. What recommendation would you give the firm with respect to the proposed cash management assuming the firm's opportunity cost is 12 percent?
Additional benefit from reduced required cash
= $180,000 × 0.12 = $21,600
Reduction in administrative costs = $2,000 × 12 = $24,000
Total Benefit = $45,600
Less: Cost (Bank's fee) = $35,000
Additional benefit = $10,600
Since benefits ($45,600 ) are greater than costs ($35,000 ), the firm should accept the proposed cash management.
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