Anne Teak, the financial manager of a furniture manufacturer, is considering ope

Question

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 800 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.30 a check. The interest rate is .012% per day.

a-1. If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.) Daily interest saved $

a-2. Is it worthwhile to adopt the system? Yes No

b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system? (Do not round intermediate calculations. Round your answer to 2 decimal places).

Explanation / Answer

a-1. Reduction in outstanding cash balances arising from implementation of the lock-box system = 2 x 800 x $ 2,000 = $ 3,200,000

The return that could be earned on these funds = $ 3,200,000 x 4.38%* = $ 140,160

Annual lock-box charges = 800 x 365 x $ 0.30 = $ 87,600

Therefore lock-box advantage = $ ( 140,160 - 87,600) = $ 52,560

Daily net advantage = 52,560 / 365 = $ 144

a-2. Yes, it is worthwhile to adopt the system

b. Minimum reduction in time to justify the use of a lock-box system = $ 87,600 / 4.38% x 1/ ( 800, 2,000) = 1.25 days.

* 0.012% x 365 = 4.38%

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