Detailed Answer
(c) The requirement is to calculate the financial
costs/benefit of establishing a zero balance account system. Answer
(c) is correct because the solution is found by comparing
the cost in fees to the benefit in terms of reduced interest costs.
Since the float is reduced by four days then the firm gets the use
of $160,000 ($40,000 × 4 days) additional funds which results in
interest savings of $7,200 ($160,000 × 4.5%). The $1,200 savings
is the excess of the interest savings of $7,200 over the costs
of $6,000. Answer (a) is incorrect because it only considerers the
cost without considering the interest savings. Answer (b) is incorrect
because it is calculated by considering the $7,200 interest
savings as a cost and the $6,000 in maintenance and transfer fees
as a benefit. Answer (d) is incorrect because it only considers the
interest savings.