Your firm has an average receipt size of $140. A bank has approached you concern

Question

Your firm has an average receipt size of $140. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,200 checks per day. The daily interest rate is .016 percent. The bank charges a lockbox fee of $175 per day. What is the NPV of accepting the lockbox agreement? (Do not round intermediate calculations and 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 answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Average Receipt Size = $140

No of checks received per day = 6200 checks

Average coolection per day = 6200*140

= $868,000

..

Net Annual Savings if the Lock Box service is adopted = 868,000*2*0.016

= $27,776

..

NPV of the Lock Box Agreement = 27,776 - 175*PVIFA(0.016%,365)

= 27,776 - 175*354.5189

= 27,776 - 62,041

=-$34,265

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