Question

Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 2 days.

Average number of payments per day		720
Average value of payment	$	670
Variable lockbox fee (per transaction)	$	.15
Annual interest rate on money market securities		4.3	%

What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

   

NPV

$

Suppose in addition to the variable charge that there is an annual fixed charge of $5,000 to be paid at the end of each year. What is the NPV now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

Answer 1

a) Avg daily cash receipts = 720 *670 =482400

therefore,

interest earned = 482400 *4.3% * 2 days earlier collection = 41486.4(note : this is per year because interest of 4.3% was an annual interest rate)

The cost for Lockbox transaction is 0.15. since there are an average of 720 payments per day , the daily cost is

=720 * 0.15 = 108

annual cost would be = 108 * 360 = 38880

Annual benefit = 41486.4 - 38880 =2606.4 ( since the result is positive , lockbox should be adopted)

b) here in addition to Variable cost Fixed cost is also there so the total cost = 38880 +5000 = 43880

thus, net beneft = 41486.4 - 43880 = - 2393.6 ( here result is negative , so the Lockbox should not be adopted)