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Calculating Collection Float

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Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank's charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.

a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?

b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?

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Solution Summary

The solution is in a word document that explains how to calculate the collection float as well as the justification of the use of a lock-box system.

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Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank’s charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.

a) if the lock box saves 2 days ...

Solution provided by:
Manal Elkhoshkhany, MBA
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  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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