There is an amount at which the interest that can be saved on a reduction of borrowings to be made with the deposited money is greater than the cost of the transfer. See the correct answer for a complete explanation.
This answer assumes that the acceleration of collections is only 1 day instead of the two days that it is. See the correct answer for a complete explanation.
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This is an incremental analysis. In an incremental analysis, we look only at amounts that will be different between the alternatives. In this question we need to compare the interest that could be earned on the money for the two additional days (which would not be earned if the money were transferred by DTC) with the cost of the wire transfers, which would gain two additional days of interest on each deposit. The cost of a wire transfer is $25. The interest that can be earned on the money for the two additional days for each transfer (expressed as an interest rate) is .072 ÷ 360 × 2 = .0004, or 0.04%. The amount of interest earned on each wire transfer will thus be .0004X, where X = the amount of the transfer. Next, we need to find what the transfer amount needs to be in order to earn more than $25 in interest during the two extra days the money will be in an interest earning deposit account. So our formula is: .0004X > $25 We solve for X by dividing both sides of the inequality by .0004, to isolate the X. When we do this, we get X > $62,500. Therefore, the amount of each transfer must be greater than $62,500, or it will not be profitable to spend $25 to move the money faster. We can check this as follows: $62,500 × .072 ÷ 360 × 2 = $25. In two days, Troy Toys will receive $25 in interest on the amount of money deposited, if the amount is $62,500. If Troy Toys is not able to transfer more than $62,500 each time, the company should not change systems, as the cost of the new system will be greater than the benefit from the new system.
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