LK Rails is trying to improve their liquidity position and reduce their reliance on short-term loans....
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LK Rails is trying to improve their liquidity position and reduce their reliance on short-term loans. In order to do so, they are looking into a lockbox system being offered by their bank. The lockbox system will speed up collections by 2 days and will cost the company $100,000. If the lockbox system is implemented, however, the bank would require the company to maintain a compensating balance of $500,000 in its account. In addition to the lockbox system the company would also extend the timing of disbursements by 3 days. The company's daily remittances amount to $1.5 million, and they could earn 5% on the funds freed up. Required: Advise LK Rails whether or not they go ahead and put these changes in place? (show all calculations) LK Rails is trying to improve their liquidity position and reduce their reliance on short-term loans. In order to do so, they are looking into a lockbox system being offered by their bank. The lockbox system will speed up collections by 2 days and will cost the company $100,000. If the lockbox system is implemented, however, the bank would require the company to maintain a compensating balance of $500,000 in its account. In addition to the lockbox system the company would also extend the timing of disbursements by 3 days. The company's daily remittances amount to $1.5 million, and they could earn 5% on the funds freed up. Required: Advise LK Rails whether or not they go ahead and put these changes in place? (show all calculations)
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