Amax Manufacturing Corp. collects $225,000 per day. The cash manager has just been told of a new collection system using lockboxes that could reduce collection float from seven days to six days by reducing mail and processing float a total of one day. Given the company's opportunity cost of funds of 14 percent and using simple interest formulas.
a.Draw a cash flow timeline for one day's collection under the existing collection system. What is the present value of existing collections? Show your calculations for an average day's collections as well as in total for a perpetuity of daily collections.
b.Draw a cash flow timeline for one day's collection under the proposed lockbox collection system. What is the present value of lockbox-based collections? Again, show the 1-day and the total value effects.
c. Ignoring bank fees to administer the lockbox system, would the cash manager recommend the new system?
d. What will happen to the disbursement float for Amax's customers if the lockbox system is implemented?
The solution explains how to assess a lock box system