Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for Newman?
A.A $0.50 fee per check
B.A flat fee of $125,000 per year
C.A fee of 0.03% of the amount collected
D.A compensating balance of $1,750,000
Isn't the current cost optimal for Newman? 700 times 1800 times .07= $88200
Considering that each proposal will produce equivalent processing results, the optimal proposal for Newman will be the lowest cost proposal. Consequently, to solve this problem, the costs of each of the proposals must be calculated.
A) 700 checks × $0.50 × 360 days = $126,000 per year
B) $125,000 per year
C) $1,800 per check × 700 checks × 360 days × 0.03% = $136,080 (btw how is this 136,000)
D) $1,750,000 × 7% = $122,500 (correct answer)