Question 5 (10 marks) Cash Management Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a
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Question 5 (10 marks)
Cash Management
Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. Therefore, it is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days.
| Average number of payments per day | 790 |
| Average value of payment | $ 740 |
| Variable lockbox fee (per transaction) | $ 0.10 |
| Annual interest rate on money market securities | 3.4% |
Required:
- What is the NPV of the new lockbox system? Without the fee, should the lockbox system be accepted?
- Suppose in addition to the variable charge that there is an annual fixed charge of $3,000 to be paid at the end of each year. What is the NPV now? With the fee, should the lockbox system be accepted?
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