16.2

Drugs R Us operates a mail order pharmaceuticalbusiness on the West Coast. The firm receives an average of$325,000 in payments per day. On average, it takes four days forthe firm to receive payment,from the time customers mail theirchecks to the time the firm receives and processes them. A lockboxsystem that consists of ten local depository banks and aconcentration bank in San Francisco would cost $6,500 per month.Under this system, customers checks would be received at thelockbox locations one day after they are mailed, and the dailytotal would be wired to the concentration bank at a cost of $9.75each. Assume that the firm can earn 10 percent on marketablesecurities and that there are 260 working days and hence 260transfers from each of the ten lockbox locations per year.

a. What is the total annual cost of operating the lockboxsystem?

b. What is the dollar benefit of the system to DrugsR Us?

c. Should the firm initiate the lockbox system?