Question

In: Finance

Show all calculations 1. Ticky-Tack products has average receipt size of $459. it processes 2,568 checks...

Show all calculations

1. Ticky-Tack products has average receipt size of $459. it processes 2,568 checks per day. VXB Bank has approached the company about a lock box service that will reduce the collection float by three days. The daily interest rate is .021 percent (7.9655% annualy). The bank is offering to provide this service at a charge of $0.25 per check with an annual fee of $30,000. What will be the net annual savings if the service were adopted?

2. What other benefits are derived from use of a lock box that need to be considered?


Solutions

Expert Solution

1. Calculation of annual savings = Annual interest saving - Annual charges

Looking at the facts given in the question, we get:-

Daily receipt - $459*2568 checks = $1,178,712

Yearly receipt (assuming 365 days a year) = $1,178,712*365 days = $430,229,880

Yearly interest saving = .021%*3*$430,229,880 = $271,044.82

Annual charges = $30,000

Charges per check = $0.25

Total checks in a year = 2568*365= 937,320

Total charges = $30,000 + $0.25*937,320 = $264,330

Savings = $271,044.82 - $264,330.00 = $6,714.82

2. Apart from the savings in interest due to use of lock box, the following benefits are also to be considered:-

a) Hassle-free processing - By outsourcing the processing, the company isn't only saving the interest, It's also saving the time consumed and hence, it can put more efforts into business than check processing.

b) Increase in working capital - By decreasing the float period, the working capital is available at an average of 3 days prior and hence, the cash flows stay on a positive side

c) Better internal controls - Having a lockbox prevents the checks from getting lost due to negligence and the records are readily available for reconciliation. It also encourages segregation of duties making the internal controls stronger.

d) Accurate and timely information - The business receives timely information of checks processed and hence, it gives a better visibility of cash flows


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