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Lockbox System - Paper Submarine Manufacturing

Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time.
It has determined the following:

Average number of payments per day 400
Average value of payment $1,400
Variable lockbox fee (per transaction) $ .75
Daily interest rate on money market securities .02%

The total collection time will be reduced by three days if the lock box system is adopted.
a. What is the PV of adopting the system?
b. What is the NPV of adopting the system?
c. What is the net cash flow per day from adopting ? Per check?

Solution Preview

a. What is the PV of adopting the system?

The present value of adopting the system is the number of days collections are reduced times the average daily collections, so:
Number of days collection reduced = 3
Average daily collection = 400 payments X 1,400 average value per payment
PV = 3(400)(1,400)
PV = $1,680,000

b. What is ...

Solution Summary

The solution explains how to evaluate a lockbox system using the concept of NPV

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