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Question 5 (10 marks) Cash Management Bird's Eye Treehouses, Inc., a Kentucky company, has determined that...

Question 5

Cash Management

Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. Therefore, it is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days.

Average number of payments per day

790

Average value of payment

$ 740

Variable lockbox fee (per transaction)

$ 0.10

Annual interest rate on money market securities

3.4%

Required:

  1. What is the NPV of the new lockbox system? Without the fee, should the lockbox system be accepted?
  1. Suppose in addition to the variable charge that there is an annual fixed charge of $3,000 to be paid at the end of each year. What is the NPV now? With the fee, should the lockbox system be accepted?

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