Foxtrot Company thinks that a lockbox system can shorten its accounts receivable

Question

Foxtrot Company thinks 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 investments with a return of 15%. The cost of the lockbox system is $9,000 per year.

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

b.   What is the net cash benefit if the firm adopts the lockbox system?

    Should the firm adopt the proposed system and why or why not?

Explanation / Answer

a) 3240000 * 3/ 365 = 26630.14 is made avaialble

b) Net benefit = 26630.13 * 15/100 - 9000 = -5005.48

The firm shouldnot adopt this as there is a net loss

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