Arshadi Wineries is considering the purchase of lockbox services from Bob's Bank. Currently, it takes six days to collect funds from customers; this would be reduced by two days with the lockbox system. The average number of payments received per day is 300 and the average cheque size is $150. Bob's will charge 5'per cheque in return for operating the lockbox system. Assume one-year T-bills yield 5%, and use a 360-day year.

What is the smallest acceptable reduction in collection time that could occur, from the point-of-view of Arshadi Wineries that would make the lockbox acceptable?

Question

What is the smallest acceptable reduction in collection time that could occur, from the point-of-view of Arshadi Wineries that would make the lockbox acceptable?

Quizplus · Accepted Answer

The smallest acceptable reduction in collection time is 2.50 days. This is calculated by comparing the cost savings from reduced collection time with the cost of the lockbox service. The savings from reduced collection time is calculated as the interest earned on the funds collected earlier, which must be greater than or equal to the cost of the lockbox service.

Arshadi Wineries Is Considering the Purchase of Lockbox Services from Bob's