You are the assistant treasurer for Rylan Enterprises and you are reviewing the company's banking agreements.
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You are the assistant treasurer for Rylan Enterprises and you are reviewing the company's banking

agreements.  You have received an account analysis from First National Bank for the company for the previous full year.  The Treasurer, Ann Richards, has asked you if there is anything that can be done to reduce the firm's banking costs. You believe that the latest figures reflect a typical year for Rylan.  In addition to the account analysis, you have compiled the following information: the company requires $1,500,000 in available balances for transaction purposes, while float at First National averages $1,250,000.  Currently, Rylan compensates First National using only balances, although First National may be compensated through balances, fees, or a combination of both.

Ms. Richards has been approached by Second State Bank, which is directly across the street from First, about using their banking services.  Since you are in the process of reviewing the firm's banking costs, she wants you to determine the cost of doing business with Second State. Rylan has been with First National Bank for over 22 years, although you think Ms. Richards may consider moving the firm's accounts to Second State Bank if you can justify the move.  Second State's charges are listed below.  Your task is two-fold.  In a memorandum to Ms. Richards, first, you are to recommend (cost-justify and discuss your findings in your memorandum) which compensation method (all fee, all balance, or mixed) Rylan should be using. Test all three approaches with each bank, show your results, discuss them in your memorandum and then make your recommendation.  Assume any excess funds would be invested in Treasury Bills.  Second, using the compensation method you recommended, you are directed to evaluate the costs of using First National and Second State and further recommend to Ms. Richards which bank Rylan should use, taking into account all quantitative and qualitative issues.

Rylan Enterprises

Account Analysis for First National Bank

Activities and Charges for the Previous Year

Item                                        Number                     Unit Cost                  Total

Account Maintenance                  15                     $625.00                     $  9,375.00

Deposit Items                       197,582                     $    0.085                   $ 16,794.47

Checks Encoded                  158,742                     $    0.035                   $  5,555.97

Coin and Currency                   3,957                     $   5.00                       $ 19,785.00

Wire Transfers                          2,514                     $ 14.00                       $ 35,196.00

Checks Presented               175,231                     $   0.11                       $ 19,275.41

Total Service Charges                                                                              $105,981.85              

Previous Year Balance Analysis for First National Bank

Average Ledger Balance                                                    $11,000,000.00

            Less: Average Bank / Deposit Float                                 $  1,250,000.00

            Average Available Balance                                                $  9,750,000.00

            Less: Reserve Requirements                    10.00%          $     975,000.00

            Free Balances                                                                      $  8,775,000.00

            Earnings Credit                                            1.85%            $     162,337.50

            Fees Owed ( Credit )                                                         ($      56,355.65)

Second State Bank

                        Item                                                                            Unit Cost

                        Account Maintenance                                                         $  550.00

                        Deposit Items                                                                       $    0.095

                        Checks Encoded                                                                  $    0.000

                        Coin and Currency                                                               $  10.00

                        Wire Transfers                                                                      $     7.50

                        Checks Presented                                                               $     0.10

Other Second Bank Information

                        Average Float                                                           $1,350,000.

                        Earnings Credit Rate                                                       2.10%

Other Misc. Information

                        Current T-Bill Rate                                                           2.33%

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