Question

If the system is implemented, the collection time will be reduced by 2 days. The average number of payments per day is 919, with an average payment value of $1,061. 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 2.76% 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?

Answer 1

Present value of lock box service = Number of checks * Reduction in collection time * average receipt
= 919 * 2 * $1061
= $1,950,118

Nominal interest rate can be calculated by using the following excel formula:
=NOMINAL(2.76%,365)
= 2.72%

Interest rate per day = 2.72% / 365 = 0.007459%

Daily cost = Present value of lock box service * Interest rate per day
= $1,950,118 * 0.007459%
= $145.4681

Maximum transaction fee = Daily cost / Number of payments per day
= $145.4681 / 919
= $0.158

Maximum transaction fee = $0.158