Question

Carter & Carter is considering setting up a regional lockbox system to speed up collections. The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized? a. $32,400 b. $29,160 c. $40,000 d. $44,000 e. $36,000

Answer 1

c. $40,000

Step-by-step explanation:

Reduction in Account Receivables $500,000

($2,500,000 * 20%)

* Interest rate 11%

Annual saving $55,000

Less: Annual cost of system -$15,000

Pretax Net annual savings $40,000