Question

Drugs 'R Us operates a mail-order pharmaceutical business on the West Coast. The firm receives an average of $325,000 in payments per day. On average, it takes four days for the firm to receive payment, from the time customers mail their checks to the time the firm receives and processes them. A lockbox system that consists of ten local depository banks and a concentration bank in San Francisco would cost $6,500 per month. Under this system, customers' checks would be  received at the lockbox locations one day after they are mailed, and the daily total would be wired to the concentration bank at a cost of $9.75 each. Assume that the firm can earn 10 percent on marketable securities and that there are 260 working days and hence 260 transfers from each of the ten lockbox locations per year. Find the dollar benefit of the system to Drugs 'R Us.

(Note: For the purpose of this problem, ignore the cost of operating the lockbox system.  Note, that the 10 percent is an opportunity cost to the firm; it is the rate of return that the firm is foregoing by not receiving immediate payment from its customers.  The sooner the firm receives payment, the sooner Drugs 'R Us can invest the dollars in marketable securities.  Find how much additional dollar return the firm could earn if it received payment 4 - 1 = 3 days sooner.)