A company receives an average of 325,000 dollars in payments a day. On average it takes 4 days for the company to receive the checks via the mail. The company wants to establish a lockbox system. Where customers checks would be sent to a local bank instead of the company. There would be 10 local depository banks and a concentration bank, which would cost $6,500 a month. The company would get the check the next day and the daily total would be wired to the concentration bank at $9.75 each. Assume that the firm could earn 10% on short term investments; further assume 260 working days, and hence 260 transfers from each lockbox location per year.
a. What is the total annual cost of operating the lockbox system?
b. What is the dollar benefit of the system to the company?
c. Should the firm initiate the lockbox system?