1. Should Foah’s Designs implement the lockbox system?
2. Suppose Foah’s Designs plans to transfer money on a weekly basis (every Tuesday) from California State Bank to Yakima State Bank. Which transfer method should it use if the interest paid on its funds in Yakima State Bank is 0.5% higher than what they earn from California State Bank?
3. Assuming that Foah’s Designs has a $2 million line of credit and that its accounts payable average $1,417,000, determine whether the firm should continuing paying Jewelry Findings, Inc., after 45 days or instead should begin accessing the line of credit from Yakima State Bank.
Foah’s Designs sells precious metal jewelry throughout the western half of the United States. It is based in Yakima, Washington, and currently all customers mail their payments to the Yakima office. The average amount of float is 6.5 days. The firm is considering implementing a lockbox system in Los Angeles. Total annual sales that are expected to be routed to the Los Angeles lockbox are $68,000,000, with an average check amount of $1,300. The lockbox system would be administered by California State Bank, which will charge a fee of $0.25 per check and an annual fixed charge of $10,000. Foah’s Designs has a cost of capital of 12% per year, and the lockbox is expected to reduce float to 4 days. However, there is some chance that the lockbox will only reduce float to 5 days.
The firm must also decide between using EDT or wire transfers when transferring funds between California State Bank and its local bank, Yakima State Bank. Using the wire transfer method would cost $20 per transfer whereas the EDT method would cost only $1.50 per transfer. However, the wire transfer method would result in the funds arriving at Yakima State Bank one day sooner. Foah’s Designs is also faced with a decision concerning its accounts payable. Foah’s purchases its inventory from Jewelry Findings, Inc. on credit. Jewelry Findings’ terms of trade are 3/15 net 45, and Foah’s Designs normally pays after exactly 45 days. However, it has been considering accessing a line of credit from Yakima State Bank to pay its accounts payable after exactly 15 days instead. The commitment fee on the unused portion of the credit line is 0.3%, and the interest rate on the loan from Yakima State Bank is 8.9%. There are no compensating balance requirements. Assume a 365-day year.