As the financial manager for a sporting goods manufacturer, you are responsible for the firms cash management activities, including the cash collection system. Your firm receives 5,000 remittances per year with an average face value of $10,000. The current collection system consists of customers remitting payments directly to company headquarters. The average mail delay is three days. The typical remittance remains at headquarters for two days. On average, each deposit is available in two days. It costs your firm $0.35 to process each check. Your bank is interested in selling you a lockbox system for check collection. Their lockbox system would reduce mail float by two days, processing float by two days, and availability float by one day. The bank charges a variable cost of $0.80 per item and an annual fixed cost of $65,000. Assume that the opportunity investment rate is 7 percent.

a.Based on these assumptions should you switch to the lockbox system?

b.Recent changes in your product market have resulted in higher than expected demand. Thus, your firms estimate of expected remittances per year is revised upward to 6,000. Further, the bank has offered to slash the variable cost from $0.80 to $0.60. Based on these revised values, should you switch to the lockbox system?