Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $25,000 plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. The average customer payment in this region is $8,200. Treasury bills are currently yielding 5 percent per year. Assume a year has 365 days. Approximately how many customers each day, on average, are needed to make the system profitable for Cow Chips, Inc.?

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Quizplus · Accepted Answer

NPV = 0 = ($8,200 F1F1F1S1F1F1F10 1 F1F1F1S1F1F1F10 N) - ($0.10 F1F1F1S1F1F1F10 N)/0.000134 - $25,000/0.05N = 67 customers per day