Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lockbox system. She forecasts that 300 payments a day will be made to lockboxes, with an average payment size of $1,500. The bank’s charge for operating the lockboxes is either $.40 a check or compensating balances of $800,000.

a. If the interest rate is 9%, which method of payment is cheaper?

b. What reduction in the time to collect and process each check is needed to justify use of the lockbox system?

AppendixLO1