Answer:
$770,245
Explanation:
The reduction in cash balances associated with implementing the system can be calculated as follows;
Average Value of collection for 4 days = Average daily cash receipts x Reduction in collection time
<em>Where;</em>
Average daily cash receipts = Average number of payments per day x Average value of payment
Average daily cash receipts = 355 x $945
Average daily cash receipts = $335,475
Reduction in collection time = 4
Average Value of collection for 4 days = $335,475 x 4
Average Value of collection for 4 days = $1,341,900
Lockbox fee per day = Average number of payments per day x Variable lockbox fee (per transaction)
<em>where;</em>
Variable lockbox fee (per transaction) = $0.30
Lockbox fee per day = 355 x $0.30
Lockbox fee per day = $106.50
Annual Interest Rate = 0.068
Since all the values are on a day basis, so let us find the value on interest per day, as follows;
Daily Interest Rate = Annual Interest Rate / No. of days in a year
Daily Interest Rate = 0.068 / 365
Daily Interest Rate = 0.0001232877
Hence, Present Value of the Lock Box can be calculated as follows;
Present Value of Lock Box = Lockbox fee per day / Daily Interest Rate
Present Value of Lock Box = $106.50 / 0.0001863014
Present Value of Lock Box = $571,654
Therefore the NPV of the Lock Box can be calculated as follows;
NPV of the Lock Box = Average Value of collection for 1.5 days - Present Value of Lock Box
NPV of the Lock Box = $1,341,900 - $571,654
NPV of the Lock Box = $770,245
Since the value of NPV is positive, Paper Submarine Manufacturing, should consider using the lock box system.