B&C Co. has an average receipt size of $249. A lockbox service should decrease the average total collection time by 1.6 days at a cost of $95 per day. The company typically receives 2,150 checks per day. The daily Treasury interest rate is .012 percent. What is the NPV of the lockbox project?

Question

Quizplus · Accepted Answer

First, we need to calculate the cost savings of using a lockbox:
Savings per day = average receipt size * number of checks per day * (1 + daily interest rate) * collection time difference - lockbox cost per day
Savings per day = $249 * 2,150 * (1 + 0.012%) * 1.6 - $95
Savings per day = $4,831.74

Next, we need to calculate the present value of these savings over the 5-year project life:
PV of savings = savings per day * (1 - (1 + discount rate)^- (number of days in 5 years / 365)) / discount rate
PV of savings = $4,831.74 * (1 - (1 + 8%)^-1825)) / 8%
PV of savings = $20,417.55

Finally, we need to subtract the initial investment in the lockbox project:
NPV = PV of savings - initial investment
NPV = $20,417.55 - $50,000
NPV = $64,893

Therefore, the best choice would be A, as it has the highest NPV value.

B&C Co Has an Average Receipt Size of $249