28. Lockboxes (S31.4) The financial manager of JAC Cosmetics is considering opening a lockbox in Pittsburgh. Checks

Question:

28. Lockboxes (S31.4) The financial manager of JAC Cosmetics is considering opening a lockbox in Pittsburgh. Checks cleared through the lockbox will amount to $10,000 per day. The lockbox will make cash available to the company three days earlier than is currently the case.

a. Suppose that the bank offers to run the lockbox for a $20,000 compensating balance. Is the lockbox worthwhile?

b. Suppose that the bank offers to run the lockbox for a fee of $0.10 per check cleared instead of a compensating balance. What must the average check size be for the fee alternative to be less costly? Assume an interest rate of 6% per year.

c. Why did you need to know the interest rate to answer part

(b) but not to answer part (a)?

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