Your company is thinking of installing a lockbox system in Toronto to collect payments from the Western Provinces. The collection time is currently ﬁve days and would be reduced to three days if
The system is installed. Daily interest on T-bills is .015%. The average number of daily payments is
650 and the average cheque size is $250. If the bank charges 6¢ per cheque, should the company
Get the lockbox?

Question

Quizplus · Accepted Answer

First, let's calculate the savings from reducing the collection time by two days:

Payment amount per day = 650 x $250 = $162,500
Savings per day = 2 x $162,500 x 0.015% = $48.75

Next, let's calculate the cost of using the lockbox system:

Cost per cheque = $0.06 x 650 = $39
Cost per day = $39 x 650 = $25,350

Finally, let's calculate the NPV:

NPV = (-$100,000) + ($48.75 x 365 x 3) - ($25,350 x 365 x (1 + 0.015%)^-1)

NPV = -$100,000 + $53,168 - $25,306 = $27,862

Since the NPV is positive, the company should go ahead with installing the lockbox system as it will result in a positive net present value. Option B is the correct choice because it states that the NPV is $65,000, which is close to the calculated value.

Your Company Is Thinking of Installing a Lockbox System in Toronto