Firm A has annual revenues of $1.6 billion and can reduce its float by four days using a lockbox system. Due to A’s significant risk, A has a high cost of capital of 22%. Firm B has annual revenues of $850 million and can reduce its float by three days using a similar lockbox system. Firm B is less risky than Firm A, as evidenced by B’s cost of capital of 10%. Assuming the lockbox system costs $2 million, which firm benefits more from using the system? If the two firms merge, making it necessary to have only one lockbox system for the combined firm, then how much is the net benefit of having the lockbox system under this circumstance?
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