Problem 1- The cash manager of BRONCO Inc. is contemplating the choice between using a wire transfer and an EDT. She estimates that her investment opportunity rate is 10 percent. The bank's ECR is currently 7 percent and the reserve requirement is 10 percent. Her bank account officer informs her that a wire transfer will cost $20 and will provide collected balances one day earlier than the EDT which costs $0.75. Further, assume that the transfer will occur during the middle of the week.

a) Assume that the balances transferred are above the balances required to compensate the deposit for bank services. Calculate the minimum transfer balance required to justify the use of a wire transfer.

b) Assume that the balances transferred are below the balances required to compensate the deposit bank. Calculate the minimum transfer balance required to justify the use of a wire transfer.

c) Why are the answers in two preceding parts different?

Problem 2- The following data were recently collected by the cash manager at RAYCO Department stores, Inc.

Day                                                Dolar Deposits

Monday                                           $1,500

Tuesday                                          $2,000

Wednesday                                      $1,000

Thursday                                         $10,000

Friday                                             $25,000

Saturday                                         $35,000

Sunday                                           $10,000

These daily deposits are typical of RAYCO's ten regional stores. RAYCO is headquartered in Oklahoma city and concentrates cash from the ten local deposit banks to its concentration bank in Oklahoma city. You may assume that RAYCO's opportunity investment rate is 10 percent, the ECR is 8 percent and the reserve requirement is 12 percent. Further assume that RAYCO uses EDT's to concentrate the cash balances and that the EDT's is initiated on the day of deposit and clears the next day. Deposits are made before the daily ledger cut off time. Also half of each deposit is cash and half is in checks with one day availability. Finally assume that no bank clearing activity is conducted on the weekends and the beginning ledger and  collected balance for the first week are equal to zero.

a) Assuming that the deposit schedule is typical of each week, create two weeks of deposits and transfer clearing activity .

b) Calculate the average collected balance at the typical deposit bank.

c) Assuming that each EDT costs $1.00, calculate the dollar amount of collected balances required to compensate the deposit bank

d) What is the total cost of the cash concentration system for one bank for one week?

e) Can you suggest any improvements in RAYCO's cash concentration system?