Discussion:
Lock-box system
Please help with the following problem.
Century Corporation uses a continuous billing system that results in average daily receipts of $600,000. The company treasurer estimates that a proposed lock-box system could reduce its collection time by 2 days.
(a) How much cash would the lock-box system free up for the company?
(b) What is the maximum amount that Century Corporation would be willing to pay for the lock-box system if it can earn 6%on available short-term funds?
(c) If the lock-box system could be arranged at an annual cost of $40,000, what would be the net gain from instituting the lock-box system?