Your firm has an average receipt size of $155. A bank has approached you concern

Question

Your firm has an average receipt size of $155. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 5,700 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $115 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 $155. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 5,700 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $115 per day.

     
    What is the NPV of accepting the lockbox agreement? (Round your answer to 2 decimal places. (e.g., 32.16))           NPV $      
   

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 $      

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Savings = Average Receipt*Number of Checks Per Day*Time Saved = 155*5700*1 = 883500

Present Value of Cost = 115/.018%

NPV = 883500 - 115/.018% = 244611.11

Part B:

Annual Savings = 883500*(1.00018)^365 - 883500 = 59989.64

Annual Cost = 115*FVIFA(365,.018%) = 43380.54

Annual Savings = 59989.64 - 43380.54 = 16609.10

Net Annual Savings = 16609.10

Thanks.

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