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

Average number of payments per day 355
Average value of payment $ 945
Variable lockbox fee (per transaction) $ 0.30
Daily interest rate on money market securities 0.068 %.

The total collection time will be reduced by four days if the lockbox system is adopted. What is the PV of adopting the system?

$770,245

Explanation:

The reduction in cash balances associated with implementing the system can be calculated as follows;

Average Value of collection for 4 days = Average daily cash receipts x Reduction in collection time

Where;

Average daily cash receipts = Average number of payments per day x Average value of payment

Average daily cash receipts = 355 x $945

Average daily cash receipts = $335,475

Reduction in collection time = 4

Average Value of collection for 4 days = $335,475 x 4

Average Value of collection for 4 days = $1,341,900

Lockbox fee per day = Average number of payments per day x Variable lockbox fee (per transaction)

where;

Variable lockbox fee (per transaction) = $0.30

Lockbox fee per day = 355 x $0.30

Lockbox fee per day = $106.50

Annual Interest Rate = 0.068

Since all the values are on a day basis, so let us find the value on interest per day, as follows;

Daily Interest Rate = Annual Interest Rate / No. of days in a year

Daily Interest Rate = 0.068 / 365

Daily Interest Rate = 0.0001232877

Hence, Present Value of the Lock Box can be calculated as follows;

Present Value of Lock Box = Lockbox fee per day / Daily Interest Rate

Present Value of Lock Box = $106.50 / 0.0001863014

Present Value of Lock Box = $571,654

Therefore the NPV of the Lock Box can be calculated as follows;

NPV of the Lock Box = Average Value of collection for 1.5 days - Present Value of Lock Box

NPV of the Lock Box = $1,341,900 - $571,654

NPV of the Lock Box = $770,245

Since the value of NPV is positive, Paper Submarine Manufacturing, should consider using the lock box system.

answer; enforce the rules;