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 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

$

Answer 1

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)

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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)