Question

Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Answer 1

Answer:

pre tax annual saving = 40000

Explanation:

given data

receivable balance = $2.5 million

loan = 11% annual interest rate

reduce receivables = 20%

annual cost of the system = $15,000

to find out

pre-tax net annual savings

solution

we know reduction in A/R = 2500000 × 20%

Reduction in A/R = $500000

and

annual saving with 11 % interest is = 55000

so pre tax annual saving is = annual saving - annual cost of system

pre tax annual saving = 55000 - 15000

pre tax annual saving = 40000