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# Lockbox

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The financial manager of JAC Cosmetics is considering opening a lockbox in Pittsburgh. Checks cleared through the lockbox will amount to \$300,000 per month. The lockbox will make cash available to the company three days earlier than is currently the case.

1. Suppose that the bank offers to run the lockbox for a \$20,000 compensating balance. Is the lockbox worthwhile?
2. Suppose that the bank offers to run the lockbox for a fee of \$0.10 per check cleared instead of a compensating balance. What must the average check size be for the fee alternative to be less costly? Assume an interest rate of 6 percent per year.
3. Why did you need to know the interest rate to answer (b) but not to answer (a)?

#### Solution Preview

The financial manager of JAC Cosmetics is considering opening a lockbox in Pittsburgh. Checks cleared through the lockbox will amount to \$300,000 per month. The lockbox will make cash available to the company three days earlier than is currently the case.

1. Suppose that the bank offers to run the lockbox for a \$20,000 compensating balance. Is the lockbox worthwhile?

Amount of checks cleared per month (30 days)= \$300,000
Therefore, Amount of checks cleared per day= \$10,000 =300000/ 30

Lock box makes cash 3 days ...

#### Solution Summary

Evaluates a lockbox system.

\$2.19

## Rate of return on weekly investments, Lock box

8) A company's weekly cash position is as follows:
? Week 1 \$24,000
? Week 2 \$34,000
? Week 3 \$10,000
? Week 4 \$15,000
The annual interest rate for investments is 12% what return can the company earn on these weekly investments.

9) A company with most of its customers in New York, has decided to consider using a lock box to help improve it's cash flow. The bank has indicated it will be able to reduce the company's collection float by 3 days. Given the following details should the lock box option be used
? Average number of payments per day in new York is 150
? Average value of each payment is \$15,000
? Fixed annual lock box fee is \$80,000
? Transactional fee for lock box use is \$.50 per payment
? Money market Investment has a interest rate of 7.5%

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