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Prime Bank is offering your company the use of their lockbox services. They estimate that you...

Prime Bank is offering your company the use of their lockbox services. They estimate that you can reduce your average mail time, clearing and processing time by 2.5 days by putting the checks into the clearing system sooner. Your firm receives 198 checks a day with an average value of $2,300 each. The current T-Bill rate is .011 percent per day. Assume a 365-day year. Prime Bank will charge your firm an annual fee of $27,500 plus $.20 per check. What is the annual net savings from installing this system?

a) $4,115.36

b) $2,816.00

c) $3,480.00

d) $3,756.78

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Answer #1

option (d) i.e $3,756.78 is the correct answer.

CALCULATION OF CURRENT PROCESSING COST

Current cost per year = Cheques per day * Avg. value per cheque * T-bill rate per day * Number of days processed * No. of days in a year

Current Cost per Year = 198 cheques * $2,300 * 0.00011 * 2.5days * 365 days

Current Cost per Year = $45,710.775

PROCESSING COST AFTER INSTALLING THE SYSTEM

Processing cost = Fixed Cost + (Number of cheques in a year * cost per cheque)

Processing cost = $27,500 + (198cheques * 365days * $0.20 per cheque)

Processing Cost = $41,954

Saving in cost after installing new system = Current processing Cost - Cost after installing the system

Savings in cost = $45,710.775 - $41,954

Savings in Cost = $ 3,756.78

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