Problem 27-12 Calculating Transactions Required Cow Chips, Inc., a large fertili

Question

Problem 27-12 Calculating Transactions Required Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $15,000 paid at the end of the year plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. Treasury bills are currently yielding 5 percent per year. If the average customer payment in this region is $5,200, how many customers are needed, on average, each day to make the system profitable for Cow Chips? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Number of customers per day

Explanation / Answer

Calculate the daily interest rate:

Annual interest rates = (1+ Daily interest rate)^365

1.05                           = (1 + Daily interest rate)^365

Daily interest rate      = 0.0134%

Use the NPV formula and set the value of "NPV" to zero.

NPV = (Average payment X Collection period XNo. of checks)-(Transaction fee x No. of checks)/Avg. interest rate-(Annual fee / T-Bill rate)

    0    = ($5,200 x 1x N) - ($0.10 X N) / 0.000134 - ($15,000/0.05)

$300,000 = $5,200 (N) - $746.27 (N)

N              = 67.36

Therefore, the number of customers that would make the system profitable for the company is 64

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.