Although faust corporation has customers dispersed throughout the United States,

Question

Although faust corporation has customers dispersed throughout the United States, the company has maintained its headquarters and central billing system in Atlanta. Management is considering an alternative collection procedure to reduce its float. On average, it takes five days from the time customers mail payments until Faust is able to receive, process, and deposit them. Faust would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by four days - bringing it down to one day. Faust receives an average of $2,520,000 in payments per day.

If Faust's opportunity cost is 10 percent, how much is the lockbox system worth on a monthly basis

Explanation / Answer

IN A MONTH EVERY PAYMENT IS RECIEVED AFTER 5 DAYS SO IN A MONTH ONLY 6 PAYMENTS ARE RECIVED[ 30/50=6]

AVERAGE PAYMENTRECIEVED PER DAY = 2520000

TOTAL PAYMENT RECIEVED IN A MONTH = 30*2520000

=75600000

UNDER OLD POLICY AVERAGE DELAY IN PAYMENTS = 5DAYS ( 30/5 = 6PAYMENTS IN A MONTH]

UNDER THE LOCKBOX SYSTEM AVERAGE DELAY IN PAYMENTS = 1 DAY

SO WE WILL RECIEVE THE PAYMENT IN 7 DAYS UNDER THE LOCKBOX SYSTEM

SO TOAL SAVINGS IN A MONTH = 30-7 = 23 DAYS INTEREST ON (2520000*23)@ 10%

= 23/365 * 10% * 57960000

=365227

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