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Byron Sporting Goods operates in Miami, Florida. The firm produces and distributes a full line of athletic equipment on a nationwide basis. The firm currently uses a centralized billing system. Byron Sporting Goods has annual credit sales of $438 million. Austin National Bank has presented an offer to operate a concentration-banking system for the company. Byron already has an established line of credit with Austin. Austin says it will operate the system on a flat-fee basis of $200,000 per year. The analysis done by the bank's cash management services division suggests that 3 days in mail float and 1 day in processing float can be eliminated.

Because Byron borrows almost continuously from Austin National, the value of the float reduction would be applied against the line of credit. The borrowing rate on the line of credit is set at an annual rate of 8 percent. Furthermore, because of the reduction in clerical help, the new system will save the firm $66,000 in processing costs. Byron uses a 365-day year in analyses of this sort. Should Byron accept the bank's offer to install the new system?

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  • Category:- Basic Finance
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