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In: Finance

Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are...

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 days.
  
Average number of payments per day
770
Average value of payment
$
720
Variable lockbox fee (per transaction)
$
.20
Annual interest rate on money market securities
5.3
%
What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV
$

Solutions

Expert Solution

Assumption:

i) Zero initial pay hence, zero initial investment

ii) Number of payment per day = number of transaction

iii) NPV means, present value of cash flow for infinitite life = Cashflow / rate of interest.

For no fixed charges

Yearly Payment $    2,62,800.00 (Avarage payment 720 x 365 days)
Aerage Transaction / Year 281050 ( Average transaction 770 x 365)
Variable Fee / Year $          5,621.00
Cash Flow / Year $    2,57,179.00
Interest Rate @ Money Market Securitied 5.30%
NPV ( Considering for infinite life) $ 48,52,433.96 ( Cashflow / interest rate = for whole life present value)

-----------------------------------------------------------------------------------------------------------------------------------------------------------

For fixed charges with 4000 $

Yearly Payment $    2,62,800.00 (Avarage payment 720 x 365 days)
Aerage Transaction / Year 281050 ( Average transaction 770 x 365)
Variable Fee / Year $          5,621.00
Fixed cost $          4,000.00
Cash Flow / Year $    2,53,179.00
Interest Rate @ Money Market Securitied 5.30%
NPV ( Considering for infinite life) $ 47,76,962.26 ( Cashflow / interest rate = for whole life present value)

jeff jeffy answered 2 years ago
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