Your firm has an average receipt size of 125 A bank has appr

Your firm has an average receipt size of $125. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 7,000 checks per day. The daily interest rate is .016 percent. The bank charges a lockbox fee of $175 per day

What is the NPV of accepting the lockbox agreement? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV $__________

What would the net annual savings be if the service were adopted? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NET ANNUAL SAVING $____________

Solution

Solution :

7000 x 125 = 875,000 x 2 = 1,750,000

PV of costs = 175 x / 0.00016 = 1,093,750

NPV = 1,750,000 – 1,093,750 = 656,250

Hence, the NPV of accepting the lockbox agreement is 656,250