Lockboxes. The financial manager of JAC Cosmetics is considering opening a lockbox in Calgary. Cheques cleared through the lockbox will amount to $300,000 per month. The lockbox will make cash available to the company three days earlier.
a. Suppose that the bank offers to run the lockbox for a $20,000 compensating balance.Is the lockbox worthwhile?
b. Suppose that the bank offers to run the lockbox for a fee of .10 per cheque cleared instead of a compensating balance. What must the average cheque size be for the fee alternative to be less costly? Assume an interest rate of 6% per year.
c. Why did you need to know the interest rate to answer b but not answer a?