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3 years ago

Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:

Business

2 answers:

erik [133]3 years ago

5 0

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.

Ostrovityanka [42]3 years ago

3 0

Answer:

-1,185,282.35‬

Explanation:

The average daily collections are the average number of payments times the average value of a payment, so:

Average daily collections = =355 * 945

Average daily collections = $335,475

The present value of the lockbox service is the average daily receipts times the number of days the collection is reduced, so:

PV = (4 day reduction)( $335,475)

PV = $1,341,900‬

The daily cost is a perpetuity. The present value of the cost is the daily cost divided by the daily interest rate. So:

PV of cost = (.3*355)/.00068

PV of cost = $106.5/.00068= $156,617.65

The firm should take the lockbox service. The NPV of the lockbox is the cost plus the present value of the reduction in collection time, so:

NPV = $156,617.65 - 1,341,900

NPV = -1,185,282.35‬

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