Ralph Taylor, a nationwide department store chain, currently processes all of its credit sales payments at its
Question:
Ralph Taylor, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to process payments from its customers in 10 western states. With the lockbox system, average mailing time for customers from this region would be reduced from 4 days to 2 day. Check-clearing time would also be reduced from 4 days to 1 days. Annual collections from the western region are $215 million. Establishment of this lockbox system would reduce the compensating balance requirement at the firm's St. Louis bank by $450,000 and reduce annual payment processing costs at the St. Louis office by $50,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 6% before taxes. The Los Angeles bank has agreed to process Ralph Taylor's customer payments for an annual fee of $250,000. What are the annual net pretax benefits to Ralph Taylor of establishing a lockbox system with the Los Angeles bank?
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow