How much money can be saved annually by setting up a lock-box system that will process 500 cheques per day at a cost of $0.20 per cheque if each cheque averages $220, collection float is reduced by three days, and the annual interest rate is 8 percent?

Question

Quizplus · Accepted Answer

The savings from a lock-box system can be calculated by first determining the daily amount of money processed, which is 500 cheques * $220 = $110,000. The reduction in collection float by three days means this amount can be accessed three days earlier, so the total amount accessed earlier annually is $110,000 * 3 = $330,000. With an annual interest rate of 8 percent, the savings are $330,000 * 0.08 = $26,400. However, the cost of processing each cheque ($0.20) for 500 cheques daily over a year (365 days) is $0.20 * 500 * 365 = $36,500. Therefore, the net savings are $26,400 - $36,500 = -$10,100, indicating an annual saving of $10,100 when considering the cost of the lock-box system.

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