A Delaware Bank Has Offered to Set Up a Lock-Box

A Delaware bank has offered to set up a lock-box arrangement to process Union Oil Company of California's (UNOCAL) credit card payments from customers in 8 mid-Atlantic states for an annual fee of $150,000 plus $0.05 per payment.Total collections from this area are $547.5 million annually-consisting of an average of 10 payments per year from 1,100,000 credit card customers.Average mailing time for customers from this region would be reduced from 3.5 days currently to 2 days with the lock-box system.Check processing and clearing time also would be reduced from 5 days presently to 1.5 days with the lock-box arrangement.Establishment of the lock-box system would reduce annual payment processing costs at its Los Angeles headquarters by $250,000 and reduce the compensating balance at its Los Angeles bank by $500,000.The Delaware bank will not require UNOCAL to maintain a compensating balance if it establishes a lock-box system.Funds released by the lock-box arrangement can be invested elsewhere in the firm to earn 15% per annum pretax.Determine the net pretax benefits to UNOCAL of establishing the lock-box system with the Delaware bank.(Assume 365 days per year in the calculations.)

A) $675,000
B) $750,000
C) $500,000
D) $450,000