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wire transfer VS depository transfer check

• 1.  wire transfer VS depository transfer check

Posted 15 days ago
Dears,

Hope everything fine with you!

I met an question in P2 regarding wire transfer VS depository transfer check and appreciated you could help.

Below is from Wiley CMA P2.

JKL Industries requires its branch offices to transfer cash balances once per week to the central corporate account. A wire transfer costs \$12 and assures the cash is available the same day. A depository transfer check (DTC) costs \$1.50 and generally results in funds being available in 2 days. JKL's cost of short-term funds averages 9%, and they use a 365-day year in all calculations. What is the minimum transfer amount that would justify the cost of a wire transfer as opposed to a DTC? (Round answer up to the next hundred.)

 \$24,300 \$27,400 \$42,600 \$21,300

My concern is that why not X * 0.0005 -12= 1.5? as X * 0.0005 -12 represent the net benefit of wire transfer?

If the co. go for DTC it will cost it \$1.50 and will take two days for funds to be available and if it will go for wire transfer it will cost JKL \$12 and funds will be available same day.

So the excess amount that JKL will pay over DTC would be = \$12 - \$1.50 = \$10.5

Now if the co. goes for DTC they can borrow money for two days at 9% . Thus interest charge for two days would be = 0.09/360 X 2 =0.0005

Lets suppose that \$10.5 (calculated earlier) is the interest charge that the co. will be paying  if it will choose DTC and X is the total amount of transfer

So the minimum transfer amount that would justify the cost of wire transfer would be

X * 0.0005 = \$10.5

or      X = 10.5 / 0.0005 = \$21,000

i.e. if the co. is transfering any amount less than \$21,000 it should go for DTC as it will cost them less but if the amount is \$21,000 or more they should go for wire transfer as it will save them money.

The minimum transfer amount occurs when the net benefit of the wire transfers is equal to the cost of the DTC. The net benefit of the transfers is equal to the interest for 2 days saved, less the annual wire transfer costs.

thank you very much

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Nancy Yang
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• 2.  RE: wire transfer VS depository transfer check

Posted 15 days ago
Hello Nancy,

Trust you are safe and doing well in Part-2 study

I think we should simplify the presented explanation with a different easy approach:
1- The key point is: The time it takes to deposit the money in JKL bank account for both given alternatives. (Same day , 2 days)
2- The question is: What is the minimum transfer amount that would, justify the cost of a wire transfer as opposed to a DTC?

The cost of a wire transfer = \$12
The cost of a DTC = \$1.50 + The cost of funding short term operations for (2) days
The cost of funding short term operations for (2) days = Minimum Transfer \$ amount (MT) x Interest rate

Applying the above info to justify the two costs:
\$12 = \$1.50 + (MT x 9% ÷ 365 x 2)
\$12 = \$1.50 + (MT x 0.000493)
MT = \$10.50 ÷ 0.000493
MT = \$21,300