Your firm has an average receipt size of $175. A bank has approached you concern

Question

Your firm has an average receipt size of $175. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 5,900 checks per day. The daily interest rate is 0.016 percent. The bank charges a lockbox fee of $125 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 $175. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 5,900 checks per day. The daily interest rate is 0.016 percent. The bank charges a lockbox fee of $125 per day.

Explanation / Answer

Daily Abge Rxpts = 5900*175 = $1,032,500

SO for 1 days, Avge Rxots = $1,032,500*1 = $1,032,500.00

PV of costs = 125/0.016% = $781,250.00

So NPV = $1,032,500 -$781,250 = $251,250.00 ....Ans (a)

Annual savings = $1,032,500.00*(1+0.016%)^365 - $1,032,500.00

= $62,088.00

Annual cost = $125* FV(Rate,nper,pmt)

= 125*FV(0.016%,365,-1) = $46,979.70

So Annual net savings =$62,088-$46,979.70 = $15,108.30 if service is adapted.

Recomendatiion : Yes. Accept the Lockbox service

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