Diamond Enterprises Limited (DEL) sells merchandise through mail order.

After receiving their ordered merchandise customers make their payments through checks which they mail to the firm (DEL). It takes five days for DEL to receive the funds. Rainbow Bank Limited (RBL) has made a proposal to operate a lock box for DEL. Checks cleared through the lock box amount to Rs. 20,000 per day and the lock box will make these funds available to DEL 2.5 days faster. The opportunity cost of funds to DEL is 6% per year. Note that situation in QuestionI and Question-II given below are independent of each other.

I. Compute the advantage that is the positive amount or the disadvantage that is the negative amount to DEL, if the bank provides the lock box services in exchange for a compensating balance amounting to Rs. 30,000.00? Show your calculations.

II. Instead of a compensating balance, the bank proposes to provide lock box services on a fee basis, charging an annual fee of Rs.1,000.00 plus Rs.10 per check. DEL expects 40,000 checks per year to be processed through the lock box. Compute the annual profit or (loss) amount associated with accepting the fee based proposal? Show your computations?

III. Which is more profitable to DEL, the compensating balance proposal in part-I, or the fee based proposal in part-II? Why?

Answer rating: 100% (QA)

Solution 01 Annual saving from the lockbox is Rs 3000 The annual ... View the full answer