Your firm has an average receipt size of $120. A bank has approached you concern

Question

Your firm has an average receipt size of $120. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,800 checks per day. The daily interest rate is 0.017 percent. The bank charges a lockbox fee of $170 per day.

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))

Your firm has an average receipt size of $120. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,800 checks per day. The daily interest rate is 0.017 percent. The bank charges a lockbox fee of $170 per day.

Explanation / Answer

A. NPV of accepting the lock bax:

Average daily collections = No.of checks received * Average value of a check = 6800*120 = $816,000

1. PV of savings of lock box = Average daily collections * No.of days collection is reduced = 816000*2 = $1,632,000

2. PV of cost = Daily cost / Daily interest rate = 170/0.00017 = $1,000,000

Therefore NPV = 1,632,000 - 1,000,000 = $632,000

B. Net Annual savings:

1. Annual savings = Future value of annual savings - Annual savings

                            = [1632000 * (1.000017)365 ] - 1632000

                            = [1632000 * 1.06] - 1632000

                            = 1736464.21 - 1632000 = 104464.21

2. FV of cost = 170 * FVIFA of 365,0.017%

                     = 170 * [ (1+ 0.00017)365 -1] /0.00017

                      = 170 * [1.06-1]/0.00017

                      = 64009.93

Therefore Netsavings = 104464.21 - 64009.93 = 40454.28

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