The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban's customers. Saban's financial manager believes the new system would decrease its collection float by as much as 7 days. The new bank would require a compensating balance of $ 21 comma 000 , whereas its present bank has no compensating balance requirement. Saban's average daily collections are $ 9 comma 900 , and it can earn 8.5 % on its short-term investments. Should Saban make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest-earning account.)

The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban's customers. Saban's financial manager believes the new system would decrease its collection float by as much as 7 days. The new bank would require a compensating balance of $ 21 comma 000 , whereas its present bank has no compensating balance requirement. Saban's average daily collections are $ 9 comma 900 , and it can earn 8.5 % on its short-term investments. Should Saban make the switch? (Assume the compensating balance at the new bank will be deposited in a non-interest-earning account.)

Yes, Saban corporation should switch to banks because the benefit of $69,300 is more than cost 0f $21,000.

Explanation:

As a result of using the electronic fund transfer system, the amount that is immediately available to Saban corporation can be calculated as below:

Amount available = number of days * average daily collections

Amount available = 7 days * $ 9,900 = $69,300.

Saban will have to pay a cost because she has to keep $21,000 in a non-interest earning account.

Yes, Saban corporation should switch to banks because the benefit of $69,300 is more than cost 0f $21,000.