24. Arshadi Wineries is considering the purchase of lockbox services from First

Question

24. Arshadi Wineries is considering the purchase of lockbox services from First Bancorp. Currently, it takes 6 days to collect funds from customers; this reduced by 2 days per day is 300 and the average check size is $150. First Bancorp will charge Se per in return for operating the lockbox system Assume one-year T-bills yield 5%, and use a 360-day year. would be with the lockbox system. The average number of payments received check (i) Calculate the daily rate of return (ii) Should Arshadi Wineries purchase the system (i.e., is its NPV greater than 0?) (ii) What is the maximum acceptable cost per check that Arshadi Wineries coul pay and still find the system acceptable?

Explanation / Answer

Ans. (i) daily Average Return = 5/360 = .014%

(ii) Calculation of Opportunity cost of 6 days = 6X300X$150 =$270000X5%X6/360 = $225

Opportunity cost after accepting lockbox service collection period is reduced to 2days

Now Opportunity = (2X300X150)X5%X2/360 = $25

Add: cost of service=(.05X300X2) = $30

Total cost after accepting lockbox = $55

(iii) Calculating maximum acceptable cost per check = $255 / (300X6) = $255/1800 = $.142 per check

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