A company is considering implementing a lockbox system. If the system is implemented, the collection time will be reduced by 2 days. The average number of payments per day is 953, with an average payment value of $1,019. The lockbox charges a fee per transaction. (That is, the more the number of transactions, the more the total fees.) Assume the company can earn a 3.04% EAR on its cash balances and that there are 365 days in a year. What is the maximum transaction fee the company can pay and still be able to adopt the project with a positive NPV?
Question 8 options:
$0.159 |
|
$0.163 |
|
$0.167 |
|
$0.171 |
|
$0.176 |
Present value of lock box service = Number of checks * Reduction
in collection time * average receipt
= 953 * 2 * $1019
= $1,942,214
Nominal interest rate can be calculated by using the following
excel formula:
=NOMINAL(3.04%,365)
= 2.99%
Interest rate per day = 2.99% / 365 = 0.008205%
Daily cost = Present value of lock box service * Interest rate
per day
= $1,942,214 * 0.008205%
= $159.358951
Maximum transaction fee = Daily cost / Number of payments per
day
= $159.358951 / 953
= $0.167
Maximum transaction fee = $0.167
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