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.
To determine the recommendation, we need to compare the cost of the direct send option with the potential benefits of earning interest on the funds earlier. Here's how we can calculate that:
1. Calculate the potential interest earned with the normal processing method:
The amount of the check is $800,000, and if the funds become available in 6 days, the firm can earn interest for that period. Using the formula for simple interest, we can calculate the potential interest earned as follows:
Interest = Principal x Rate x Time
Interest = $800,000 x 11% x (6/365)
Interest = $1,808.22 (rounded to the nearest cent)
2. Calculate the net benefit of the direct send option:
The cost of the direct send option is $650. So, the net benefit (potential interest earned minus the cost of direct send) can be calculated as follows:
Net Benefit = Potential Interest Earned - Cost of Direct Send
Net Benefit = $1,808.22 - $650
Net Benefit = $1,158.22 (rounded to the nearest cent)
If the net benefit is positive, it means the firm stands to gain more from the direct send option. If negative, it means the potential interest earned is lower than the cost of direct send.
In this case, the net benefit of the direct send option is $1,158.22, which is positive. Therefore, the recommendation would be to choose the direct send option. By doing so, the firm can receive the funds in 2 days and potentially earn more in interest than the cost of the direct send.