Durst Corporation began operations five years ago as a small firm serving customers in the Denver area.

Question:

Durst began operations five years ago as a small firm serving customers in the Denver area. However, its reputation and market area grew quickly so that today Durst has customers throughout the entire United States. Despite its broad customer base, Durst has maintained its headquarters in Denver and keeps its central billing system there. Durst’s management is considering an alternative collection procedure to reduce its mail time and processing float. On average, it takes five days from the time customers mail payments until Durst is able to receive, process, and deposit them. Durst would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by three days—bringing it down to two days. Durst receives an average of $1,400,000 in payments per day.
a. How many days of collection float now exist (Durst’s collection float) and what would it be under the lockbox system? What reduction in cash balances could Durst achieve by initiating the lockbox system?
b. If Durst has an of 10 percent, how much is the lockbox system worth on an annual basis?
c. What is the maximum monthly charge Durst should pay for the lockbox system?

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