Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts

Question:

Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts that 300 payments a day will be made to lockboxes, with an average payment size of $1,500. The bank’s charge for operating the lockboxes is either $.40 a check or compensating balances of $800,000.

a. If the interest rate is 9%, which method of payment is cheaper?

b. What reduction in the time to collect and process each check is needed to justify use of the lockbox system?

Lockboxes
Lockbox banking is a service provided by banks to companies for the receipt of payment from customers. Under the service, the payments made by customers are directed to a special post office box instead of going to the company. The bank goes to the...