Smith Corp. is establishing a lock-box system to reduce its float. The firm anticipates saving 2 days of mail time and 0.50 days of processing time through the system. It expects 500 payments to be collected daily, at an average size of $350. The appropriate interest rate is 5 percent per year. If its bank charges $0.15 per payment, should the firm set up the lock box system?

What is the break-even bank charge per item that the firm could consider paying to the bank for providing this service? (7 marks)

ii. Smith Corp. produces a product that generates repeat orders on an annual basis. Their product has a current price of $2,500 and a current cost of $2,100. The firm uses a 15% opportunity cost of capital. Due to the product's high cost, there is a 17% chance that each new customer will default on payment. What is the expected profit and break-even probability from granting credit under these conditions?