Breshna Company has a lock box arrangement with Azizi Bank for its customer of south zone in…

Breshna Company has a lock box arrangement with Azizi Bank for its customer of south zone in Afghanistan. Azizi bank handles 6 million per day in return for a compensating balance of 4 million. Breshna Company can earn 12 percent on money market instruments. a. The management of Breshna Company is considering an option to divide the south zone into a south eastern zone (with 1.5 million per day collections, and it could be handled by Bakhtar Bank for 1.5 million compensating balance) and a south western zone (with 2.5 per day collections, and it could be handled by Ghazanfar Bank for 2.5 million compensating balance) and a south northern zone (with 2 million per day collections, and it could be handled by Afghan United bank for 2 million compensating balance). In each case, the collection would be one day quicker than with Azizi Bank arrangement. What would be the annual saving or cost of dividing the south zone? b. In order to retain Breshna Company, Azizi Bank offered to handle all the collections on the basis of fee with no compensating balance. What would be the maximum fee that Azizi Bank could charge and still retain Breshna Company?

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