You are assessing whether to use a lockbox system to accelerate your cash availability. With a lockbox, a bank assumes all the effort of receiving and posting the payments. The best offer from your banks is to process each transaction for $0.55/transaction plus an annual fixed fee of $25,000. You receive 220 payments per day (assume 365 business days per year) and the average payment is $2,750. Finally, you can earn a return on cash balances of 2% per year, or 0.0055% per day. By using the lockbox, you will have your payments credited to your bank account 5 days sooner. A. How much would you have to pay to the bank every year to use their lockbox system? B. How much would you increase your daily cash balances as a result of the lockbox? (Hint: DaysSaved x #DailyPayments x PaymentSize C. What incremental interest income would you earn each year by using the lockbox? D. Does the lockbox proposal make sense? Why or why not? |