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Lock boxes and collections

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It takes a company about 6 days to receive and deposit checks from customers...management is considering a lockbox system to reduce collection time. It is expected that the lockbox system will reduce receipt and deposit times to 3 days. Average daily collections are $140,000 and the required rate of return is 9 % per year...

a. what is the reduction in outstanding cash as a result of implementing a lockbox system?
b. what dollar return could be earned on these savings?
c. what is the maximum monthly charge the company should pay for this lockbox system?

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Solution Summary

The solution considers the use of a lockbox for collecting deposit checks.

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a. what is the reduction in outstanding cash as a result of implementing a lock box system?
Saving in the collection float= 6 days-3 day= 3 ...

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