Your firm has an average receipt size of $125. A bank has approached you concern

Question

Your firm has an average receipt size of $125. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 5,800 checks per day. The daily interest rate is.017 percent. The bank charges a lockbox fee of $170 per day. What is the NPV of accepting the lockbox agreement? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) 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 answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

The Number of Checks per day = 5,800

The Average receipt size = $ 125

Saving in collection days = 2 days

The Daily Interest rate = 0.017 %

The Benefit in the form of interest saving on account of this is = 5800 * $ 125 * 2 * 0.017% = $ 246.50

The Cost of Lock Box = $ 170

The NPV of the accepting lockbox agreement = $ 246.50 - $ 170 = $ 76.50

Net annual savings be if the service adopted = 365 * 76.50 = $ 27,922.50

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