Your firm has an average receipt size of $145. A bank has approached you convern

Question

Your firm has an average receipt size of $145. A bank has approached you converning a lockbox service that will decrease your total collection time by one day. You typically receive 6,100 checks per day. The daily interest rate is 0.017 percent. The bank charges a lockbox fee of $115 per day.

1. What is the NPV of accepting the lockbox agreement? (round answer to 2 decimal places e.g. 32.16)

NPV= $?

2. 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= $?

Please show all work and clearly lable the answers as follows: NPV= $? and Net annual savings= $?

Thanks

Explanation / Answer

Daily Abge Rxpts = 6100*145 = 884500

SO for 2 days, Avge Rxots = 884500*2 = 1,769,000

PV of costs = 115/0.017% = 676470.58

So NPV =1,769,000- 676470.58 = 1092529.42

Annual savings = 1,769,000*(1+0.017%)^365 - 1,769,000 = 105235

Annual cost = $175* FV(Rate,nper,pmt)

= 115*FV(0.017%,365,-1) = $65,772

So Annual net savings = 105235-$65,772 =$39,463 if service is adapted.

Recomendatiion : Yes. Accept the Lockbox service

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