QUESTION 5 (25 marks)

(a) XYZ firm has an average receipts size of $150. Fox bank has approached XYZ firm on a lockbox service that will reduce their total collection time by two days. XYZ firm typically receive 4,850 checks per day. The daily interest rate is 0.20 percent. If the bank charges a fee of $ 140 per day, should the lockbox project be accepted? What would the net annual savings be if the service were adopted? (15 marks)

(b) Discuss factors that determine the length of the credit period of a company? (10 marks)