Garden Groves, Inc., a Florida-based company, has determined that the majority of its customers are located in the New York City area. Therefore, it is considering using a lock box system offered by a bank located in New York. The bank has estimated that use of the system will reduce collection float by three dates. Based on the following information, should the lock box system be adopted?
- Average number of payments per day: 150
- Average value of payment: $15,000
- Fixed annual lock box fee: $80,000
- Variable lock box fee: $0.50/transaction
- Annual interest rate on money-market securities: 7.5 percent
Reduction in outstanding cash as a result of implementing a lock box system:
Saving in the collection float= 3 days
Thus Reduction in ...
This solution provides calculations for determining whether a new system should be adopted.