Cash Management at

Webb Corporation
Presented by Group 4
 Our Team
Phạm Thị Phương Anh Phạm Nguyễn Minh Phương

Vũ Thị Bảo Châu Đinh Thị Hà Trang Ngô Minh Tâm

Table of contents
1. Summarize case study

2. Problem and solution

 Summarize case study
Webb Corporation currently employs a lockbox system with collection
centers in San Francisco, St. Louis, Atlanta, and Boston. (4 centers)
Current Cash collection policies :
On average, each lockbox center handles $175,000 in payments
each day
Then, invest these payments in short-term marketable securities
daily at the collection center banks.
Every two weeks (after 14 days), the investment accounts are
swept; the proceeds are wire-transferred to Webb’s headquarters in
Dallas to meet the company’s payroll.
The investment accounts each earn .012 percent per day
The wire transfers cost .20 percent of the amount transferred.
 Summarize case study
New Proposal Cash collection policies:
Third National Bank, located just outside Dallas, about the
possibility of setting up a concentration banking system for Webb
Corp, will accept each of the lockbox center’s daily payments via
automated clearinghouse (ACH) transfers in lieu of wire transfers
The ACH-transferred funds will not be available for use for one day.
Once cleared, the funds will be deposited in a short-term account,
which will yield .012 percent per day.
Each ACH transfer will cost $150
 Summarize case study
Which one is better? Current or New policies?
1. Total net cash flow available from the current lockbox system to
meet payroll?
2. Should the company proceed with the concentration banking
system?
3. What cost of ACH transfers would make the two policies equal?
 Question 1:
What is Webb Corporation’s total net
cash flow available from the current
lockbox system to meet payroll?
 Solution:
In this problem, we will solve the total net cash flow needed by
the company in order to finance the current payroll using the
lockbox system.

The lockbox system redirects the payment of the customers to a

single mailing address of the bank. The bank will then collect all
of these payments and remit them to the company at the end of
the day.
 Solution:
In order to solve for the cash flow needed, we will calculate the
available cash:

=> The available cash each day is $700,000

 Solution:
Next, we will calculate the future value of daily investments. We
will use this formula for this:
 Solution:
Substituting the values, we will get:
Future values of daily investment = $700,000 x 14.01092524
= $9,807,647.67
=>The future value of daily investment is: $9,807,647.67

Finally, to solve for the cash flow needed, we take 1 minus the
transfer cost and multiply the future value with the results:
Payroll amount = $9,807,647.67 x (1 - .20%) = $9,788,032.375
=> The amount needed to fund the payroll for the lockbox system
is: $9,788,032.375
 Question 2:
Under the terms outlined by Third National
Bank, should the company proceed with the
concentration banking system?
 Solution:
We will compare the cash available for the old system and the new
system being proposed. We can recall that in order to get this, we
must first solve for the cash available for 14 days.

=> This means the cash available for 14-day investment is : $699,400
 Solution:
We can solve for the future value of the investment by multiplying
this by the annuity factor. We can recall that the annuity factor we
used in the previous problem is 14.01092524
 Solution:
Moreover, we can see from the problem that there will be a one-
day delay in processing these payments.
 Solution:
Now, we can compare the value of the investment for the two
systems:

Since the difference is positive, therefore, the new system should

be adopted by the firm.
 Solution:
In this type of problem, we were able to compare the future value of
two systems and determine which of those would be more beneficial
to the company.
As we can see from the problem, there is a concept of a cost/value of
delay which is evident in Step 5 where the delay was considered and
the value of the investment dropped.
Despite the delay, however, the new system still yielded a higher
value compared to the old system which means that the new system
is more beneficial to the firm.
 Question 3:
What cost of ACH transfers would
make the company indifferent between
the two systems?
 Solution:
To find the cost at which the company is indifferent, we set the
amount available we found in Question 1 equal to the cost equation
we used in Question 2. Setting up this equation where X stands for
the ACH transfer cost, we find: