Wade Retailers, a nationwide department store chain, currently processes all of its credit sales payments at its
Question:
Wade Retailers, a nationwide department store chain, currently processes all of its credit sales payments at its Chicago 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 4.5 days to 1.5 days. Check clearing time would also be reduced from 2 days to 1 day. Annual collections from the western region are $500 million. Establishment of this lockbox system would reduce the compensating balance requirement at the firm’s Chicago Bank by $1,000,000 and reduce annual payment processing costs at the Chicago office by $350,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 10 percent before taxes. The Los Angeles bank has agreed to process Wade’s customer payments for an annual fee of $600,000. What are the annual net pretax benefits to Jackson of establishing a lockbox system with the San Francisco bank (assume 365 days per year)?
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow