MINICASE Cash Management at Webb Corporation Webb Corporation was founded 20 years ago by its president, Bryan Webb. The company origi- nally began as a mail-order company, but has grown rapidly in recent years, in large part due to its website. Because of the wide geographical dispersion of the company's customers, it cur- rently employs a lock-box system with collec- tion centers in San Francisco, St. Louis, Atlanta, and Boston.

Holly Lennon, the company's treasurer, has been examining the current cash collection poli- cies. On average, each lockbox center handles $ 270,000 in payments each day. The company's current policy is to invest these payments in short-term marketable securities daily at the collection center banks. Every two weeks, the investment accounts are swept; the proceeds are wire-transferred to Webb's headquarters in Dallas to meet the company's payroll. The investment accounts each earn .013 percent per day, and the wire transfers cost .20 percent of the amount transferred.

Holly has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration bank- ing system for Webb Corp. Third National will accept each of the lockbox center's daily pay- ments via automated clearinghouse (ACH) transfers in lieu of wire transfers. The ACH- transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will yield .013 percent per day. Each ACH transfer will cost $175. Bryan has asked Holly to deter- mine which cash management system will be the best for the company. As her assistant, Holly has asked you to answer the following questions.

1.What is Webb Corporation's total net cash flow available from the current lockbox system to meet payroll?

2.Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?

3.What cost of ACH transfers would make the company indifferent between the two systems?

MINICASE:

CREDIT POLICY AT HOWLETT INDUSTRIES

Sterling Wyatt, the president of Howlett Industries, has been exploring ways of improving the company's financial performance. Howlett manufactures and sells office equipment to retailers. The company's growth has been relatively slow in recent years, but with an expansion in the economy, it appears that sales may increase more rapidly in the future. Sterling has asked Evan Bradds, the company's treasurer, to examine Howlett's credit policy to see if a change can help increase profitability.

The company currently has a policy of net 30. As with any credit sales, default rates are always of concern. Because of Howlett's screening and collection process, the default rate on credit is currently only 1.6 percent. Evan has examined the company's credit policy in relation to other vendors, and he has found three available options.

4.Which credit policy should the company use?

5.Notice that in option 3, the default rate and the administrative costs both exceed those in option 2. Is this plausible? Why or why not?