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Thread: NPV and Flotation Cost

  1. #1
    MHF Contributor
    Mar 2010

    NPV and Flotation Cost

    NPV and Reducing Float: No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4million in collections a day and requires $400,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $2million of collections a day and each requires a compensating balance of $250,000. No More Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided. Should the company proceed with the new system? What will be the annual net savings? Assume the T-Bill rate is 5% annually.

    I obtained a negative NPV of 400,000 for Floyds and a negative NPV of 300,000 for each bank A and B. Therefore, none of the choices are worth it. I have to have an error some where.
    Last edited by dwsmith; Apr 20th 2010 at 05:00 PM.
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