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 7,200 checks per day. The daily interest rate is .018 percent. The bank charges a lockbox fee of $185 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 answer to 2 decimal places, e.g., 32.16.)

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 7,200 checks per day. The daily interest rate is .018 percent. The bank charges a lockbox fee of $185 per day.

Explanation / Answer

NPV of accepting the lockbox agreement:
($130 * 7200*2) – ($185/0.00018) = $1,872,000 - $1,027,777.77 = $844,222.23

Net Annual Savings:
Each Check = $130
The interest on $130 for two days = 2 * $130 * 0.00018 = $0.0468
Total interest saved per day = $0.0468 * 7200 = $336.96
Net annual savings = $336.96 * 365 = $122,290 per year

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