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

First, we need to calculate the total daily collection before and after implementing the lockbox system:
Total daily collection before = 405 payments x $1,200 each = $486,000
Total daily collection after = $486,000 - (405 x $0.65) = $483,047.5

Next, we need to calculate the reduction in collection time:
4 days x 0.03% daily interest rate = 0.12% reduction in interest expense

Now we can calculate the present value of adopting the lockbox system:
PV = [(Annual savings / (1 + discount rate)n] + [(Reduced interest expense / (1 + discount rate)n)]
Discount rate = daily interest rate x days in a year = 0.03% x 365 = 10.95%
n = years = 4 days / 365 = 0.011

Annual savings = (405 x $0.65) x 365 = $95,962.5
Reduced interest expense = ($486,000 - $483,047.5) x 0.12% = $87.21

PV = [($95,962.5 / (1 + 0.1095)^0.011) + ($87.21 / (1 + 0.1095)^0.011)]
PV = $1,944,000

Therefore, the best choice is A, with a present value of $1,944,000.

Roze Corporation Is Investigating a Lockbox System to Reduce Its