The 1irm has other equaly risky inwestments with a reu of Lockbox system Eagle I
ID: 1174933 • Letter: T
Question
The 1irm has other equaly risky inwestments with a reu of Lockbox system Eagle Industries eels that a lockbox system can shorten its accounts eceiwable collecion pariod by 3 days. Creat sales are $3,000,000 per year, biled on a continuous basis 13% The cost ofre ootax system is $10 000 per year oow Amre a 365day year) Wh at ? ount of cash wg be mode avalatie for other uses under thie lodbo. system? b. a. what net beneft (cost? we n* firm seate if it adopts te locitar system? Souas adopt the proposed locbdi,ystem? The amount of casn that wil be mase available for other uses under the lockbo sysmiRound tothe nearest b. The net benee (cothefm will realce if it adopts the lockbox system Should it adopt the proposed lockbo ssam? (Selact the best anwer blow O No O Ye Round to the nearest doat Enter & negaive umber for antsExplanation / Answer
a) The lockbox system will reduce the collection period by 3 days. So, the cash that was blocked for 3 extra days will be available to the company earlier.
Credit sales per day = $3,000,000 / 365 days = $8,219.17808219
Amount of cash available for use = 3 x $8,219.17808219 = $24,658
b) Net benefit is the return that the company expects on the extra cash available for investment.
Net benefit = $24,658 x 13% = $3,205
Company should not adopt the lockbox system since net benefit is lower than the cost of the system.
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