Your firm has an average receipt size of $130. A bank has approached you concern
ID: 2647021 • Letter: Y
Question
Your firm has an average receipt size of $130. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,600 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $185 per day.
What is the NPV of accepting the lockbox agreement? (Round your answer to 2 decimal places. (e.g., 32.16))
NPV $_____________
What would the net annual savings be if the service were adopted? (Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Net Annual Savings $____________
Explanation / Answer
Average Receipt Size = $130
No of checks received during a day = 6600 checks
Therefore, amount of total receipt received during a day = Average Receipt Size*No of checks received during a day
= 130*6600
= $858000
Savings in interest cost due to decrease in collection by 2 days = 858000*0.018%*2
= $308.88
Lockbox fee per day = $185
..
Therefore, NPV of accepting the lockbox agreement = Savings in interest cost due to decrease in collection by 2 days - Lockbox fee for one day
= 308.88- 185
= $123.88
..
Net Annual Savings = 123.88*365
= $45216.20
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