Question
In: Finance
Your firm has an average receipt size of $120. A bank has approached you concerning a...
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Your firm has an average receipt size of $120. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 6,800 checks per day. The daily interest rate is .017 percent. The bank charges a lockbox fee of $170 per day. |
| a. | What is the NPV of accepting the lockbox agreement? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| b. | What would the net annual savings be if the service were adopted? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
Solutions
Expert Solution
Answer A)
The average daily collections = Average Receipt x Checks received per day
: Average daily collections = 120 x 6800
= $816000
Savings of the lockbox service = Average Collection x Time Saved
Savings= 2 x 816000
Savings= $1632000
PV of cost = Lock box fee / Interest
PV of cost = $170 / 0.00017
PV of cost = $1000000
The NPV = Savings - PV of cost
NPV = 1632000 - 1000000
NPV = $632000
Answer B)
Annual savings = Savings x (1 + r )365 - Savings
Annual savings = 1632000 x ( 1 + 0.017%)365 - 1632000
Annual savings = 1632000 x (1.00017)365 - 1632000
Annual savings = 1632000 x 1.064 - 1632000
Annual savings = 1736448 - 1632000
Annual savings = $104448
Annual cost = $170 x [( 1 + r )365 - 1 / r]
Annual cost = 170 x [(1.00017)365 - 1/ 0.00017]
Annual cost = 170 [ 1.064 - 1 / 0.00017]
Annual cost = 170 x 376
Annual cost = $63920
Net Annual Savings = Annual savings - Annual cost
Net Annual Savings = 104448 - 63920
Net Annual Savings = $40528
jeff jeffy answered 2 years agoRelated Solutions
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