Question

DATA INPUTS
	U. S. Bank	Wells Fargo
Rate on money market investments	3.14%	3.14%
Average Customer payment	$2,145	$2,145
Average number of payments per day	81	81
Annual fee	$16,800	$5,100
Cost per transaction	$0.11	$0.16
Reduction in collection time	4	2
The questions that the CEO needs you to answer are as follows:
(a) What is the Net Present Value (NPV) of each of the new lockbox system proposals (including the annual fixed charge)? (Round to the nearest whole dollar)
(b) How many customers are needed, on average each day, to make each of the  lockbox systems break-even? (Round to the nearest whole customer)
(c) Which is the Preferred Lockbox System for Global Manufacturing, Inc.? (U.S. Bank or Wells Fargo)
(d) How much of a reduction in accounts receivable should Global expect from the Preferred Lockbox System if implemented in 2020?   (Round to the nearest whole dollar)

Answer 1

a) Net Present Value (U.S. Bank) = Interest on Working Capital Freed - Fixed Charges - Variable Charges

= (2145*81*4*3.14%) - 16800 - (81*365*0.11) = 21822.37 - 16800 - 3252.15 = 1770.22

Net Present Value (Wells Fargo Bank) = Interest on Working Capital Freed - Fixed Charges - Variable Charges

= (2145*81*2*3.14%) - 5100 - (81*365*0.16) = 10911.19 - 5100 - 4730.40 = 1080.79

b) Average daily interest rate = 3.14%/365 = 0.0086%

Breakeven for U.S. Bank = (2145*N*4*0.0086%) - (16800*0.0086%) - (N*365*0.11*0.0086%) = 0

Now we get N = 1.96 or 2 customers

Breakeven for Wells Fargo Bank = (2145*N*2*0.0086%) - (5100*0.0086%) - (N*365*0.16*0.0086%) = 0

Now we get N = 1.2 or 2 customers

c) Preferred Lockbox system is U.S. bank due to the higher NPV.

d) Reduction in Accounts receivable due to implementation of lockbox of U.S. Bank = 2145*81*4 = 694980

Note:- Based on breakeven wells fargo may be selected for option C and D in which case the answer for D would be 347490.

Alternate assumption regarding no of days in a year may result in different answer.

Please comment in case of any doubts.