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 percent. 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 of reduced collection time and subtracting the cost of the bank charges. The benefit is the product of the reduction in collection time, the average daily collections, 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 these two amounts.

North Woods Auto Supply Is Considering Implementing a Lockbox System