Question

You are considering implementing a lockbox system for your firm. The system is expected to reduce the collection time by 4 days. On an average day, your firm receives 930 checks with an average value of $450 each. The daily interest rate on Treasury bills is .03 percent. The bank charge per check would be $.52 What is the net present value of this lockbox arrangement?

Answer 1

$62,000

Step-by-step explanation:

The computation of the net present value of this lock box arrangement is shown below:

= {Received number of checks × average value × average collection time} - {(Received number of checks × bank charges per check) ÷ daily interest rate on treasury bill}

= {930 checks $450 × 4 days} - {(930 checks × $0.52) ÷ 0.03%]

= $1,674,000 - $1,612,000

= $62,000

We simply applied the above formula to determine the net present value whether this lock box arrangement is profitable to the company or not