Question

7. Box Lock has annual sales of $4 million and is considering implementing a lockbox system, which would reduce customer collection float by four days. Box Lock has a cost of capital of 13 percent. The annual after-tax cost of the lockbox system is $2000. Assume a 365-day year, should Box Lock implement the system? What would be the benefit, in dollar amount, if it did? 8. Geo-M is considering adding a cash discount to its credit terms. If Geo-M offers 3/11 net 30 rather than its current net 30 policy, what annualized rate is the company charging customers who do not take the discount? Assume a 365-day year. 9. Fickle Sickles collects 15,000 checks per 365-day year with average amount $170 and total delay 5 days. A lockbox system would reduce that delay to 3 days, and it would also reduce FISI's check processing costs by $.01 per check. The annual fee on the lockbox would be $2,500. What is the annual net benefit associated with using the lockbox? FISI has an 7% cost of capital. 10. What is the annualized rate of not taking a 1/40 net 60 discount?

Answer 1

$ 4,000,000 2,000 365 Question 7 Annual sales Cost of lockbox Total days in year Sales per day $4,000,000 / 365) Float is reduced by Customer float ($10,959 * 4 days) Cost of capital Return on investment Net benefit ($5,699 - $2,000 $ 10,959 4 days $ 43,836 13% 5,699 $ 3,699 As the net benefit is more than the cost, so lockbox should be implemented Net Benefit because of lockbox is $3,699 Note For remaining questions, please post them separately