Egle Industries feels that a lockbox system can shorten its accounts receivable

Question

Egle Industries feels that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investiments that earn a retun of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.)

a. what amount of cash will be made available for other uses under the lockbox system?

b. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the propsed lockbox system?

Explanation / Answer

Basically, the amount they earn per day from credit sales is x = 3240000/365, and over 3 days they lose x amount of money by not receiving those accounts. So under the lockbox system they can put in 3x dollars to be use as they see fit. And they will use that to get a 15% return. So the amount they earn from the lockbox is 15% of 3x over those 3 days, and that minus the $9000 cost is the net benefit . So put it in a equation and check.

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

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