Question: Bam Corp. has annual sales of $400 million. Management has determined that an average of 10 days elapses between the time customers mail their payments and when the funds are available to the firm. Fourth National Bank has a program whereby the float can be reduced by 5 days. The program would cost Bam $100,000 in annual fixed fees to the bank, as well as a .03% fee on the annual volume of sales. Bam will also be required to have a compensating balance of $2,000,000 at Fourth National Bank.
Additionally, Bam will be able to reduce labor costs in its accounting department by $200,000. Bam can earn 15 percent (pretax) on its investments.
Show computations, which would indicate whether Bam should accept Fourth National Bank's proposal.