Question

Bird's eye treehouses, inc., a kentucky company, has determined that a majority of its customers are located in the pennsylvania area. it therefore is considering using a lockbox system offered by a bank located in pittsburgh. the bank has estimated that use of the system will reduce collection time by 1.5 days. 1. what is the npv of the new lockbox system? suppose in addition to the variable charge that there is an annual fixed charge of $5,000 to be paid at the end of each year. 2. what is the npv now?

Answer 1

Reduction in collection = 1.5 days Value of collection for 1.5 days = 1.5*800*750
= $ 900,000 (is the cash realesed by the system)
Lock box fee payble per day = 800 * $0.15 = $ 120
Interest = 5.5%