Question

18. 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 2.84% compounded daily on any cash balance. The average number of daily payments submitted to the lockbox is 2,158 with an average cheque size of $50. 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

= $50 × 2,158

=$ 107,900

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

PV = $107,900 × 2 =$215,800

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 × 2,158

   =$21.58

Interest rate = 2.84%/365 = 0.00778082191%

PV of cost = 21.58/0.00778082191%

=$277348.59

NPV = savings - PV of costs

=$(215,800 - 277,348.59)

= - $61,548.59

= - $ 61,549

The NPV of adopting this lockbox is -$ 61,549.

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