Question

Your firm has an average receipt size of $135. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 7,300 checks per day. The daily interest rate is .016 percent. The bank charges a lockbox fee of $125 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.)

Answer 1

Answer:

Daily saving (NPV) is $33

Annual saving is $12,045

Explanation:

1.What is the NPV of accepting the lockbox agreement?  

The total about to be deposited in bank lockbox per day = average receipt size * number of checks per day  

= $135 * 7,300 = $985,500

The daily interest to be received = $985,500 * 0.016% = $158

Daily saving (NPV) = Interest received – lockbox fee = $158 - $125 = $33

2. What would the net annual savings be if the service were adopted?

Annual saving = daily saving * 356 days = $33 * 365 = $12,045