Your firm has an average receipt size of $130. A bank has approached you concern

Question

Your firm has an average receipt size of $130. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,400 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $185 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 $130. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,400 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $185 per day.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Savings = Average Receipt*Number of Checks Per Day*Time Saved = 130*5400*2 = 1404000

Present Value of Cost = 185/.018%

NPV = 1404000 - 185/.018% = 376222.22

Part B:

Annual Savings = 1404000*(1.00018)^365 - 1404000 = 95331.58

Annual Cost = 185*FVIFA(365,.018%) = 69786.09

Annual Savings = 95331.58 - 69786.09 = 25545.49

Net Annual Savings = 25545.49

Thanks.

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