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Lockbox system / Concentration-banking system

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Anthony Marino, CFO of Thousand Years Inc., is evaluating two alternatives of float management: lockbox and concentration banking. The average number of daily payments to lockboxes is 250 with the average size of each payment at $7,500.The lockbox system can reduce the collection float by 1.5 days and concentration banking can reduce the collection float by 1 day. However, the bank charges an annual fee of $30,000 and $0.30 per check processed for the lockbox service .Which method is more economical for Thousand Years, the lockbox system or the concentration-banking system? Assume daily interest on Treasury bills is 0.03 percent.

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Solution Summary

The solution explains how to decide between a lockbox system or the concentration-banking system.

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Lockbox Benefit
daily float = 7,500 x 250
= $1,875,000
increased cash = 1.5 days x $1,875,000
= $2,812,500
daily Interest = 2,812,500 x .0003
= $843.75
annual interest = ...

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