ing down the hailway to the executive conference room, Abigall Holmes, the chief financial officer of Spice's Sugar Producers Inc. (SSPI), is gi with Ryan Singh, her administrative assistant and protg. It their dialogue and correctly fill in the missing information. CFO: I'm a little anxious about your presentation to the Finance Committee on Thursday, so I'd like you to run through your comments and presentation slides with me. Because three board members, induding the chair and the president, will be attending, t want you to make a very fovorable impression. It could mean a great deal to your career with SSPL. An upgraditn our recelvables collection system could have a significant effect on both SSPI's relationshlp and income stream. RYAN: Yes, 1 have my notes and the fash drive with my presentation right here. Let me get things organized and in begin. After a slighe delay, Ryan begins his presentation: Good morning. I would like to present to you the findings of our recent evaluation of the system currentiv used to collect receivables payments from our customers east of the Mississippi River. With our corporate headquarters in Wichita, Kansas, we currently have broken down the country into two regions: the portion east of the Mississippi River and the portion west of the river. We have also conducted an evaluation of a proposed lockbox system that would break down our customer base into six geographic subregions, with each being served by a lockbox collection center. These collection centers would then transfer the funds to our main concentration account here in wichita. Slide 1 shows you the key attributes of our current system. Silde # 1: Key Attributes of SSPI's Current Collection System (Eastern Region, Last Year's Data) 1. Our eastem region customers, stores that sell our colored sugar chips and granulated and powered products, remit 5,500 checks per month to our office in Wichita. 2. Annual collections for the region were 563,875,000. 3. The average delay due to float was 15 days ( 8 days mail float, 4 days processing float, and 3 days clearing float). 4. Our Wichita bank currently charges $24,000 per year in service charges and fees of $0.25 per payment to process $ hese payments. 5. 5 SP1 maintains a marketable securities portfolio that earns an averege return of 3.00%. CFO: OKay, let's stop here for a second. 1 have a question. How much does our current system cost us? RYAN: Ma'am, you're getting ahead of me a littie; that information is detailed on slide 2 . Let me show you. Slide # 2: Costs of 5SPI's Current Collection System (Eastern Reglon, Last Year's Data) 2 Annual service charges =$24,000 Annual per-parment processing fees = Cost of the current system = CFO: Good. What's next? RYAN: In contrast to the existing system, our Wichita bank has offered to create a lockbox system that would inwolve customers sending their payments directly to in their region. The banks will process the deposits and then wire the funds to our bunk in wichita. The specifics of the proposal are detalied in side 3. Slide a3: Costs of 55P1's Proposed Lockbox System 1. The average delay due to float will be reduced to 3 days (2 days mail float; no processing float; 1 day clearing float, including the wire transfer delay). 2. The bank will eliminate its current service charges and fees but will impose a compensating balance of $30,000 on our Wichita account, 5 imilar bolances will not be required in the other six banks. 3. Funds released by the lockbox system will be invested in marketable secunties and will eam an average retum of 3.00%. CFO:SO4 should we switch from our current collection system to the lockbox system? RYANi Yes, I think we should. The benefit to the lockbox system is that it saves us of float. Wait, let me show you side 4. Slide * 4: Evaluation of 5SP1's Proposed Lockbox System Average collections =$175,000 Released funds = Income eamed from the released funds = Cost of lockbox system = Net earnings on the lockbox system = Net value of the lockbox system over the current system = CFO: 5o, now thave three quesbons. First, based on these values, how does the Finance Committee know whether to recommend accepting the lockbox proposal? That is, how should we interpret these values? Second, should we give up our current system and switch to the lockbox system? And Rinally, are there any other mechods that 5SPI could use instead of a lockbox system to return customer funds to the Wichita bank account? iryaM: First, the general rule that determines whether to implement the leckbox system is this: If the net benefis are , then accept the proposal. Therefore, based on this criterion, to the lockbox system. And last, as far as ainemative methods are concerned, several cholces are available, including Cro; Overall, Ryan, you've done a very good jobl Now, take is easy this evening and get some cest so that you're ready for tomomrow's presentavion. III see you about an hour before the meeting