North Woods Auto Supply is considering implementing a lockbox system. The system is expected to reduce the collection time by 2.5 days. On an average day, North Woods receives 1,045 cheques with an average value of $1,180 each. The daily interest rate on Treasury bills is.011 %. The bank charge per cheque would be $.25. What is the net present value of this lockbox arrangement?

Question

Quizplus · Accepted Answer

The net present value (NPV) of the lockbox system is calculated by determining the benefit from reduced collection time and subtracting the cost of the bank charges. The benefit is the product of the number of cheques, average value per cheque, reduction in collection time, and the daily interest rate. The cost is the product of the number of cheques and the bank charge per cheque. The NPV is the difference between the benefit and the cost.

North Woods Auto Supply Is Considering Implementing a Lockbox System