Roze Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 405 payments with an average value of $1,200 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.65. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.03%, then determine present value of adopting the system.

Question

Quizplus · Accepted Answer

The present value of adopting the lockbox system is $1,944,000. This is calculated as follows:PV = (CF * PVAF) - (CF * PVAF)where:CF = cash flowPVAF = present value annuity factorThe cash flow is the difference between the cost of the lockbox system and the savings from reduced collection time. The cost of the lockbox system is the lockbox fee per transaction multiplied by the number of transactions. The savings from reduced collection time is the daily interest on money market securities multiplied by the number of days that the collection time is reduced multiplied by the average value of the payments.The PVAF is calculated as follows:PVAF = (1 - (1 + r)^-n) / rwhere:r = interest raten = number of periodsIn this case, the interest rate is .03% and the number of periods is 4.Plugging in the values, we get:PV = ((405 * $1,200 * $0.65) - (405 * $1,200 * .03% * 4)) * (1 - (1 + .03%)^-4) / .03%PV = $1,944,000

Roze Corporation Is Investigating a Lockbox System to Reduce Its