Your firm has an average receipt size of $130. A bank has approached you concern

Question

Your firm has an average receipt size of $130. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,900 checks per day. The daily interest rate is 0.018 percent. The bank charges a lockbox fee of $165 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))

Explanation / Answer

Daily Average Reciepts = 6900*130 = 897000

SO for 2 days, Average Reciepts = 897000*2 = 1,794,000

PV of costs = 165/0.018% = 916,666.67

So NPV = 1,794,000-916,666.67 = $877,333.33

Annual savings = 1794000*(1+0.018%)^365 - 1794000 = $121812.60

Annual cost = $165* FV(Rate,nper,pmt)

= 165*FV(0.018%,365,-1) = $62,241.65

So Annual net savings = 121812.60-62241.65 =$59570.95 if service is adapted.

Recomendatiion : Yes. Accept the Lockbox service

Answer:

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

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