3. 25.00 points Problem 27-11 Lockboxes and Collection Time Bird\'s Eye Treehous

Question

3. 25.00 points Problem 27-11 Lockboxes and Collection Time Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pitts burgh. The bank has estimated that use of the system will reduce collection time by 1.5 days Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 750 $ 700 S 15 5.5% What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g. 32.16) NPV Suppose in addition to the variable charge that there is an annual fixed charge of $5.000 to be paid at the end of each year. What is the NPV now? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16) NPV

Explanation / Answer

Present value = 2*750*700 = 1050000

Daily interest rate = (1+5.5%)1/365-1 = 0.0147%

transaction costs are a perpetuity

NPV=1050000 -((0.15*750)/0.0147%) = 283117.29

b)

NPV = 1050000 -((0.15*750)/0.0147%) - 5000/5.5% = 192208.20

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