Question

Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:

  

Average number of payments per day		425
Average value of payment	$	1,015
Variable lockbox fee (per transaction)	$	.40
Daily interest rate on money market securities		.068	%

  

The total collection time will be reduced by three days if the lockbox system is adopted.

  

a.	What is the PV of adopting the system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

PV

$

  

b.	What is the NPV of adopting the system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

NPV

$

  

c.	What is the net cash flow per day from adopting the lockbox system? Per check? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

Net cash flow	$  per day
Net cash flow	$  per check

Answer 1

a. PV of Adopting the system = Reduction in Days * Average number of payments * Average Payment

PV of Adopting the system = 3 * 425 * 1015

PV of Adopting the system = $1294125

b. NPV

NPV = PV of Adopting System - (PV Fee per transaction * Number of Transactions / Interest Rate)

NPV = 1294125 - (0.40 * 425 / 0.068%)

NPV = 1294125 - 250000

NPV = $1044125

c. Net cash Flow per Day = PV of Transactions * Daily Interest Rate - Transaction cost per day

Net cash Flow per Day = 1294125 * 0.068% - 0.40 * 425

Net cash Flow per Day = 880.005 - 170

Net cash Flow per Day = $710.00

d. Cash Flow per Check = 710 / 425 = $1.67