Your firm has an average receipt size of $175. A bank has approached you concern

Question

Your firm has an average receipt size of $175. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 6,500 checks per day. The daily interest rate is .017 percent. The bank charges a lockbox fee of $160 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 $175. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 6,500 checks per day. The daily interest rate is .017 percent. The bank charges a lockbox fee of $160 per day.

Explanation / Answer

Details Amt $ Average receipt size   $          175.00 Average check per day=                6,500 nos Average daily receipt = $    1,137,500 Lock Box saves one day of collection time. Daily Interest =0.017% So Additional Interest earned =1137500*0.017%= $          193.38 Per day Lock box fee=                    160 per day Saving per day forever = $            33.38 NPV =Value of savings in perpetuity=33.38/0.017% $ 196,323.53 Saving per day=33.38 Net Annual Saving =33.38*365= $    12,181.88

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