XYZ Company is trying to determine whether or not it should move the processing of incoming payments from their own processing center to a lockbox. Annual collections are $165 million on 45,000 items.
XYZ estimates that by using a lockbox it will decrease total collection float by 3 days.
XYZ also estimates that their costs to process payments themselves run about $1 per an item and that by moving these collections to a lockbox it would increase costs to $2 an item, plus $12,000 in fixed costs.
If the relevant cost of capital is 5.5%, should XYZ switch to the lockbox?