Question

Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore 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 2.5 days. Assume 365 days a year.

Average number of payments per day		840
Average value of payment	$	790
Variable lockbox fee (per transaction)	$	0.20
Annual interest rate on money market securities		4.0	%

What is the NPV of the new lockbox system?

NPV

$

Suppose in addition to the variable charge that there is an annual fixed charge of $4,000 to be paid at the end of each year. What is the NPV now? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

NPV

$

Answer 1

Average number of payments per day	840
Average value of payment	790
Variable lockbox fee (per transaction)	0.2
Annual interest rate on money market securities	0.04
Daily interest rate is (4%/365)	0.000109589
The total collection time reduced if the lockbox system is adopted.	2.5
Average daily collections (840*790)	663600
PV of the lockbox service(daily payments*Number of days the collection is reduced)(663600*2.5)	$          1,659,000.00
PV of the cost
Daily cost(840*0.20)	168
PV of the cost (168/0.011%)	$          1,533,000.00
NPV (1659000-1533000)	$              126,000.00
2
Average daily collections (840*790)	663600
PV of the lockbox service(daily payments*Number of days the collection is reduced)(663600*2.5)	$          1,659,000.00
PV of the cost
Daily cost	168
Annual cost(168*365)	61320
PV of the cost (168/0.011%)	1533000
Add: PV of Fixed fee ($4000/4%)	100000
Total PV cost (1533000+100000)	$          1,633,000.00
NPV	$                26,000.00