c. Since the opportunity cost of the present system ($87,500) exceeds the cost of the lockbox system ($75,000), the system should be initiated.

Federal State Combined After- Tax Security Tax Tax Effect Expected Return Treasury bills .30 0 .30 (1 - .30)8.00% = 5.60%

Commercial Paper .30 .07 .37 (1 - .37)8.50% = 5.36%

Floating-rate (1 - .70).30 preferred stock = .09 .07 .16 (1 - .16)7.00% = 5.88%