The High-Rise Construction Company, located in Houston, receives large remittances (that is, progress payments) from customers with whom it has contracts. These checks are frequently drawn on New York City banks. If the checks are deposited in High-Rise’s Houston bank, the funds will not become collected balances and usable by the firm until 2 business days later. In other words, deposits made on Monday become available for use on Wednesday, and deposits made on Friday become available to the firm on the following Tuesday. However, if High-Rise sends an employee to New York with the check and she presents it for payment at the bank upon which it is drawn, the funds will be available immediately (that is, the same day) to the firm. Assuming that High-Rise can earn 6 percent on short-term investments and that the cost of sending an employee to New York to present the check for payment is $350, determine the following:
a. The net (pretax) benefit to the firm of using this special handling procedure for a $1 million check received on the following days:
i. Monday
ii. Friday
Why do the answers to parts i and ii differ?
b. The amount of a check on which the firm just “breaks even” (that is, the net pretax benefit equals zero) using the special handling procedure, assuming that the check is received on the following days:
i. Monday
ii. Friday