Lockbox system Hardin-Gehr Corporation (HGC) began operations 5 years ago as a s
ID: 2382757 • Letter: L
Question
Lockbox system
Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit; and it keeps its central billing system there. On average, it takes 4 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 1 day-bringing it down to 3 days. HGC receives an average of $1,000,000 in payments per day.
How much free cash would HGC generate if it implemented the lockbox system? Round your answer to the nearest cent.
$
Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow?
-Select-One-time cash flowA recurring cash flowItem 2
How would growth affect your answer?
If the firm grows, cash flow -Select-would be a one-time cash flowwould increase by the differential growthwould decrease by the differential growthItem 3
If HGC has an opportunity cost of 8%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest cent.
$
What is the maximum monthly charge HGC should pay for the lockbox system? Round your answer to the nearest cent.
$
Explanation / Answer
Free cash HGC would generate if lock box system is implemented:
Average payments per day=$1,000,000.
As a result of implementation of lock box system, collection period has reduced by 1 day. It means it will be able to use $1,000,000 * 1 =$1,000,000. available for HGC. Therefore, HGC generates a free cash flow of $1,000,000 free cash.
If the company ceases to grow, then the free flow of cash remains constant at $1,000,000.
If the company grows, then there will be an increase by the differential growth.
If the opportunity cost of funds is 8%, then the savings by implementing lock box system is $1,000,000*8% =$80,000 is the interest savings per annum.
Maximum montly charge HGC should pay =Total savings due to implementation of lockbox system/number of months in the year
=$80,000/12 =$6,667.per month.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.