Linkup Systems, which provides investors with computerized information about sto

Question

Linkup Systems, which provides investors with computerized information about stock prices, is considering the establishment of a lockbox system with its bank. It has just implemented a new system which allows it to extend disbursement by 0.5 days. Its daily payments are $1 million. The firm receives daily collections of $2.5 million, and could earn 7.5% on any funds freed up through faster collections. If the lockbox system can save 2 days in the collection process, and the firm's bankers will charge $250,000 per year to operate the lockbox system and facilitate the extended disbursements, is it worth it to the company?

Explanation / Answer

Daily Collections (a) $2,500,000 Daily Payments (b) $1,000,000 Incremental Collections (c = a-b) $1,500,000 Return on Collection (d =7.5% * c) $112,500 Savings from Lockbox system 2 days Total Benefit from Lockbox system (e = d*2) $225,000 Cost of Lockbox system (f) $250,000 Net Income for Company (e-f) -$25,000 Since, lockbox system leads to loss for company, it is not worth implementing

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