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(Accelerating collections) A company with a 12% cost of capital receives cash inflows from customers throughout...

(Accelerating collections) A company with a 12% cost of capital receives cash inflows from customers throughout the United States and Canada. Checks take 5 days on average to arrive, but a large commercial bank has proposed to implement a lock box concentration banking system for a $250,000 annual fee which would cut the time a check is in receivables float to an average of 11/2 days. The company’s marginal tax rate is 35%. What is the value of the proposed system to the company, and should it be implemented, if the company’s daily cash inflows average:

a. $150,000?

b. $300,000?

c. $450,000?

d. $600,000?

Solutions

Expert Solution

A.150000-Cash inlows
Receivable Receivables
Existing Receivables           750,000.00 (((5/365)*150000)*365)
Reduction in receivables           225,000.00 ((1.5/365)*150000)*365
Difference-Cash Collected Early           525,000.00
Interest in reduced receivables              63,000.00 (525000*12%)
Less:Annual Fee net of tax           187,500.00 (250000 X (1-25%)
Net Benefit          (124,500.00) (63000-187500)
B.300000
Receivable Receivables
Existing Receivables        1,500,000.00 ((5/365)*300000)*365
Reduction in receivables           450,000.00 ((1.5/365)*300000)*365
Difference-Cash Collected Early        1,050,000.00
Interest in reduced receivables           126,000.00 (1050000*12%)
Less:Annual Fee net of tax           187,500.00
Net Benefit            (61,500.00) (126000-187500)
C.450000
Receivables
Existing Receivables        2,250,000.00 ((5/365)*450000)*365
Reduction in receivables           675,000.00 ((1.5/365)*450000)*365
Difference-Cash Collected Early        1,575,000.00
Interest in reduced receivables           189,000.00 (1575000*12%)
Less:Annual Fee net of tax           187,500.00
Net Benefit                1,500.00 (189000-187500)
C.600000
Receivables
Existing Receivables        3,000,000.00 ((5/365)*600000)*365
Reduction in receivables           900,000.00 ((1.5/365)*600000)*365
Difference-Cash Collected Early        2,100,000.00
Interest in reduced receivables           252,000.00 (2100000*12%)
Less:Annual Fee net of tax           187,500.00
Net Benefit              64,500.00 (252000-187500)
Lock box concentration banking systemshould be implemented if daily cash sales average is $600000

ekkarill92 answered 1 year ago
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