Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit

Question:

Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days—bringing it down to 2 days. HGC receives an average of $1,400,000 in payments per day.

a. How much free cash would HGC generate if it implemented the lockbox system? Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? How would growth affect your answer?

b. If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis?

c. What is the maximum monthly charge HGC should pay for the lockbox system?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...