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Problem 10: Cross Drugs currently fills mail orders from all over the U.S., and receipts come in to a head office in Little Rock, Arkansas.
Problem 10: Cross Drugs currently fills mail orders from all over the U.S., and receipts come in to a head office in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? (Hint: The company borrows cash to cover its A/R until it collects payment for the sale. But, with a continuing A/R balance, it must continue to borrow. However, if it can lower its A/R balance, it can reduce the Carrying Cost, or the interest it pays on the loan. If the regional lockbox system reduces the company's A/R balance, it can lower its annual Carrying Cost. What is the annual reduction in interest expense net of the cost of the lockbock system?) Write your answer to the nearest dollar. Do not include the dollar sign in your
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