Question

For 2019, Discovery Manufacturing is considering using a lockbox system to speed up collections from its customers. They have two proposals to consider: one from BB&T, and one from Bank of America to provide a lockbox service. The basic information about each bank's proposal is presented in the table below. (Similar to Problem 27-11 AND 27-12)

DATA INPUTS
	BB&T Bank	Bank of America
Rate on money market investments	3.14%	3.14%
Average customer payment	$2,145	$2,145
Average number of payments per day	81	81
Annual fixed charge (paid end of year)	$16,800	$5,100
Cost per transaction	$0.11	$0.16
Reduction in collection time	4	2

(a) What is the Net Present Value (NPV) of each of the new lockbox system proposals (including the annual fixed charge)? (Round to the nearest whole dollar)

(b) How many customers are needed, on average each day, to make each of the lockbox systems break-even? (Round to the nearest whole customer)

(c) Which is the Preferred Lockbox System for Discovery Manufacturing? (BB&T or Bank of America)

(d) How much of a reduction in accounts receivable should Discovery Manufacturing expect from the Preferred Lockbox System if implemented in 2019?   (Round to the nearest whole dollar)

Answer 1