A firm that is located in New York receives on average 2,000 checks a day from its customers in the Twin Cities area.Average payment per check is $1,500.A bank in the Twin Cities is offering a lock-box arrangement for collection and processing of these checks at a cost of $0.50 per check.This arrangement will reduce the float by 2 days.The daily interest rate for the firm is 0.02%.What is the net saving from the lock-box arrangement?
A) $200
B) $400
C) $1,000
D) $1,200

Question

Quizplus · Accepted Answer

Reduction in float = 2,000 × $1,500 × 2 days = $6mDaily interest savings = $6m × 0.0002 = $1,200Daily processing cost = $0.50 × 2,000 = $1,000Net daily savings = $1,200 − 1,000 = $200

A Firm That Is Located in New York Receives on Average