Anne Teak, the financial manager of a furniture manufacturer, is considering ope
ID: 2773045 • Letter: A
Question
Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 700 payments a day will be made to lock boxes with an average payment size of $2,500. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .013% per day.
If the lock box makes the cash available 2 days earlier, calculate the net daily advantage of the system. (Do not round intermediate calculations.)
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.)
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.)
Explanation / Answer
Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 700 payments a day will be made to lock boxes with an average payment size of $2,500. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .013% 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.)
Cash balance reduction = 700*2500*2 = $ 3,500,000
Daily interest saved =3500000*0.013%
Daily interest saved = $ 455
a-2. Is it worthwhile to adopt the system?
Net Cash Flow per day = Daily interest saved- Cost of Lock Box
Net Cash Flow per day = 455 - 0.4*700
Net Cash Flow per day = 175
Yes
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.)
Minimum reduction in time days = Cost of lock Box/Interest saved per day
Minimum reduction in time days = 0.4*700/(700*2500*0.013%)
Minimum reduction in time days = 1.23 Days
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