Question

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1. Ticky-Tack products has average receipt size of $459. it processes 2,568 checks per day. VXB Bank has approached the company about a lock box service that will reduce the collection float by three days. The daily interest rate is .021 percent (7.9655% annualy). The bank is offering to provide this service at a charge of $0.25 per check with an annual fee of $30,000. What will be the net annual savings if the service were adopted?

2. What other benefits are derived from use of a lock box that need to be considered?

Answer 1

• Lock-box reduces float by = 459 x 2568 x 3
  • Lock-box reduces float by = $3536136 per day
• Daily returns =  $3536136 per day x .021%
  • Daily returns =  742.58856
• Daily Cost =  $0.25 x 2568
  • Daily Cost =  642
• Daily returns - Daily Cost = Daily Net Benefit
  • 742.58856 - 642 = 100.58856
• Annual Net Benefit = Daily Net Benefit x 365
  • Annual Net Benefit = 36714.8244
• Annual cost = 30000

As Annual Net Benefit > Annual cost it is worth accepting the lock box system offer