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Anne Teak, the financial manager of a furniture manufacturer is considering operating a lock box system. She forecasts that 400 payments per 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 $0.40 a check. The interest rate is .015 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 is needed to justify use of the lock box system?

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The solution explains how to evaluate a lock box system of collecting payments

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a. We need to compare the cost and benefit of operating the lock box on a per check basis. The cost is the lock box cost and the benefit is the savings in ...

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