Question

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

  

Average number of payments per day		365
Average value of payment	$	955
Variable lockbox fee (per transaction)	$	.40
Daily interest rate on money market securities		.068	%

  

The total collection time will be reduced by three days if the lockbox system is adopted.

  

a.	What is the PV of adopting the system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

PV

$

  

b.	What is the NPV of adopting the system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

NPV

$

  

c.	What is the net cash flow per day from adopting the lockbox system? Per check? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

Net cash flow	$  per day
Net cash flow	$  per check

Answer 1

a. PV of Lockbox services = Days reduced * Average Daily Collections

PV of Lockbox services = 3 * 365 * 955

PV of Lockbox services = $1045725

b. NPV = PV of Lock box Services - Cost

NPV = $1045725 - (Variable cost * Number of Payments / Daily Interest)

NPV = $1045725 - (0.40 * 365 / 0.00068)

NPV = $1045725 - 214705.88

NPV = $831019

c. Net cash flow per day = PV of Lock Box system * Daily interest - Cost

Net cash flow per day = 1045725 * 0.068% - 0.40 * 365

Net cash flow per day = $565.09 per day

Net Cash flow per Check = Cash Flow per day / Checks per day

Net Cash flow per Check = $565.09 / 365

Net Cash flow per Check = $1.55 per check

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