Mountaintop Inns,a Kentucky company,has determined that a majority of its customers are located in the Pennsylvania area.It therefore is considering using a lockbox system offered by a bank located in Pittsburgh,Pennsylvania.The bank has estimated that use of the system will reduce collection time by one day.In addition to the variable charge shown below,there is also a fixed charge of $4,320 per year for the lockbox system.Assume a year has 365 days.What is the NPV of the lockbox system given the following information? $$\begin{array} { l l }
\text { Average number of payments per day } & 750 \
\text { Average value of payment } & \$ 1,800 \
\text { Variable lockbox fee (per transaction) } & \$ 0.30 \
\text { Annual interest rate on money market securities } & 6.0 \%
\end{array}$$

Question

Mountaintop Inns,a Kentucky company,has determined that a majority of its customers are located in the Pennsylvania area.It therefore is considering using a lockbox system offered by a bank located in Pittsburgh,Pennsylvania.The bank has estimated that use of the system will reduce collection time by one day.In addition to the variable charge shown below,there is also a fixed charge of $4,320 per year for the lockbox system.Assume a year has 365 days.What is the NPV of the lockbox system given the following information? $$\begin{array} { l l } 
\text { Average number of payments per day } & 750 \
\text { Average value of payment } & \$ 1,800 \
\text { Variable lockbox fee (per transaction) } & \$ 0.30 \
\text { Annual interest rate on money market securities } & 6.0 \%
\end{array}$$

Quizplus · Accepted Answer

NPV = (1 × 750 × $1,800) - [($0.30 × 750)/(1.06^1/365 - 1)] - [$4,320/0.06] = -$131,301

Mountaintop Inns,a Kentucky Company,has Determined That a Majority of Its