Prime Bank is offering your company the use of their lockbox services.They estimate that you can reduce your average mail time by 1.5 days and they can save you a combined clearing and processing time of 1 day by putting the checks into the clearing system sooner.Your firm receives 198 checks a day with an average value of $2,300 each.The current T-Bill rate is .011 percent per day.Assume a 365-day year.Prime Bank will charge your firm an annual fee of $27,500 plus $.20 per check.What is the annual net savings from installing this system?

Question

Quizplus · Accepted Answer

The annual net savings from installing lockbox services can be calculated as follows:
- Reduction in mail time: 1.5 days * 198 checks/day = 297 checks saved
- Combined clearing and processing time: 1 day * 198 checks/day = 198 checks saved
- Total checks saved: 297 + 198 = 495 checks
- Annual lockbox fee: $27,500 + ($0.20 * 198 checks/day * 365 days/year) = $35,710
- Opportunity cost of T-Bill rate: ($2,300/check * 495 checks * 0.011%/day * 365 days/year) = $4,953.22
- Annual net savings: $4,953.22 - $35,710 = -$30,756.78
Therefore, installing lockbox services would result in a net cost of $3,756.78 per year. Only choice D is the closest answer.

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