Question

Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:

  

Average number of payments per day		340
Average value of payment	$	930
Variable lockbox fee (per transaction)	$	0.30
Daily interest rate on money market securities		0.068	%

  

The total collection time will be reduced by four days if the lockbox system is adopted.

  

a.	What is the PV of adopting the system?

  

PV

$

  

b.	What is the NPV of adopting the system? (Do not round intermediate calculations and round your final answer to the nearest whole dollar amount.)

  

NPV

$

  

c.	What is the net cash flow per day from adopting? Per check? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

  

Net cash flow	$  per day
Net cash flow	$  per check

Answer 1

Given

Average number of payments per day = 340  

Average value of payment = $930

Variable lockbox fee (per transaction) = $0.30  

Daily interest rate on money market securities = 0.068%

Reduction days = 4

a) PV of adopting system = reduction days *Ave. number of payments per day*Ave. value of payment

                                    = 4*340*930

                                    =1264800

b) NPV of adopting system = Present value – cost incurred for adopting system

                                    = 1264800-((0.30*340)/0.068%)

                                    = 1264800-150000

                                    = $1,114,800

c) Net Cash flow per day = PV * daily interest rate – cost per day

            = 1264800*0.068% -( 0.3*340)

                                                = 780.06

            Net cash flow for check = Net cash flow per day/ average no of payments per day

                                                = 780.06/340

                                                = 2.23