Direct send-Single. Ocean Research of San Diego, California, just received a check in the amount of $800,000 from a customer in Bangor, Maine. If the firm processes the check in the normal manner, the funds will become available in 6 days. To speed up this process, the firm could send an employee to the bank in Bangor in which the check is drawn to present it for payment. Such action will cause the funds to become available after 2 days. If the cost of the direct send is $650 and the firm can earn 11% on these funds, what recommendation would you make? Explain.
Exercise anwers
To determine the recommendation, we need to compare the cost of direct sending with the potential earnings from investing the funds for the 6-day period.
First, let's calculate the potential earnings if the funds are invested for 6 days at a rate of 11%. We can use the compound interest formula:
A = P(1 + r/n)^(nt)
Where:
A = amount after interest
P = principal amount (initial investment)
r = annual interest rate (as a decimal)
n = number of times interest is compounded per year
t = time in years
In this case, P = $800,000, r = 11% = 0.11, n = 1 (as it's compounded annually), and t = 6/365 (since the interest is calculated over 365 days).
A = 800,000(1 + 0.11/1)^((1)(6/365))
Using a calculator, we can find that the amount after interest is approximately $801,209.18.
Now, let's calculate the cost of direct sending, which is $650.
Comparing the cost of direct sending ($650) to the potential earnings ($801,209.18), it is clear that the potential earnings outweigh the cost. Therefore, the recommendation would be to go ahead with the direct send option.
Explanation:
1. Calculate the potential earnings from investing the funds for 6 days using the compound interest formula.
2. Compare the cost of direct sending with the potential earnings.
3. If the potential earnings are higher than the cost, recommend the direct send option. Otherwise, recommend the normal processing method.