Nickolas Industries has daily cash receipts of $350,000. A recent analysis of the firm’s collections indicated that customers’ payments are in the mail an average of 2 days. Once received, the payments are processed in 1.5 days. After the payments are deposited, the receipts clear the banking system, on average, in 2.5 days. Assume a 365-day year.
a. How much collection float (in days) does the firm have?
b. If the firm’s opportunity cost is 11%, would it be economically advisable for the firm to pay an annual fee of $84,000 for a lockbox system that reduces collection float by 2.5 days? Explain why or why not.