Problem:
The cash manager of Verematic, Inc., is contemplating the choice between using a wire transfer and a paper-based DTC. He estimates that his investment opportunity rate is 9%. The bank's ECR is currently 4 percent, and the reserve requirement is 12%. His bank account officer informs him that a wire transfer will cost $15 and will provide collected balances one day earlier than the EDT, which costs $0.30.
Q1. Assume that the balances transferred are above the balances required to compensate the deposit bank for its services. Calculate the minimum transfer balance required to justify the use of a wire transfer.
Q2. Assume that the balances transferred are below the balances required to compensate the deposit bank. Calculate the minimum transfer balance required to justify the use of a wire transfer.
Q3. Why are the answers in the two preceding parts different?