Question

A company is currently waiting for 4 days to collect money. Through a lock box arrangement, the funds could be collected the next day (1 day float). The company is considering using 4 lock boxes strategically located in areas where it has clusters of customers. The company expects to have 5,000 checks processed per day, per lockbox, and the average amount of each check is $520. The lockbox arrangement has a fee of $0.463 per check. There is additional charge $25 at the end of each day for a wire transfer of the collected balance to the company's bank. The hurdle return for the company is .03% per day.

1. How much is the benefits from lockboxes?

2. How much is the PV of the lockbox proposal?

3. How much is the NPV for the lockbox proposal?

Answer 1

Answer to part 1.

a	b	a*b	a*0.463		(a*b) x (0.3*3)
Checks	Avg. Amount per check	Total amount	Cost		Benefit	Net Benefit (Benefit - Cost)
			Fees	Additional	Interest Saved
5000	520	2600000	2315	25	234000	231660

Above table shows the calculation of total benefit from lockboxes.

Where

Fees = $2600000 x 0.463 = $2315

Interest saved = $2600000 x (0.09) = $234000

(Because 0.03% per day, so for 3 days = 0.09%)

Net Benefit = 234000-2315-25 = 231660

Answer to part 2

Amount Recievable	PV Factor	Present Value
2600000	0.89	2310066

Amount Receivable = 5000 x 520 = 2600000

PV Factor = 1/ (1.03x1.03x1.03x1.03)

As the amount otherwise would have been received after 4 days

Present Value = Amount Recievable x PV Factor

2600000 x 0.89 = 2310066

Answer to part 3.

NPV = PV of Cash Out Inflow - PV of Cash Outflow

Inflow	Incremental Amount Received (2600000 x 0.09)	234000
Outflow	Fees	2315
Outflow	Additional	25
NPV		231660

It is assumed that the amount is received on day 1, so no PV Factor will come into play.