Question

A company is considering a lockbox system that will reduce the collection time by 2 days on average. The company can earn an APR of 2.70% compounded daily on any cash balance. The average number of daily payments submitted to the lockbox is 2,185 with an average cheque size of $47. If the processing fee per cheque is $0.01, what is the NPV of adopting this lockbox? (Assume 365 days in one year.)

Answer 1

Average daily collections = average cheque size × average number of daily payments

= $47 × 2,185

=$ 102,695

The PV of the lockbox service =average daily payments × number of days the collection is reduced

PV = $102,695 × 2 =$205,390

The PV of the cost is the daily cost (transaction fee * average number of payments) divided by the daily interest rate

Daily cost = 0.01 *2,185

   =$21.85

Interest rate = 2.70%/365 = 0.00739726027%

PV of cost = 21.85/0.00739726027%

=$295,379.63

NPV = savings - PV of costs

=$(205,390 - 295,379.63)

= - $89,989.63

= - $ 89,990

The NPV of adopting this lockbox is -$89,990 .

As the NPV is negative ,the company should not consider a lockbox system.