Asked by chisom chikezie on May 02, 2024
Verified
Burke Corporation is investigating a lockbox system to reduce its collection time. It has determined that on average, there are 900 payments with an average value of $425 each. If a lockbox system is implemented, the lockbox fee per transaction will be $0.15. If the collection time can be reduced by 4 days, and the daily interest on money market securities is.02%, then determine the present value of adopting the system.
A) $1,170,000
B) $1,260,000
C) $1,350,000
D) $1,440,000
E) $1,530,000
Lockbox System
A service provided by banks to companies for the receipt of payment from customers, involving the direct sending of payments to a location accessible by the bank, which then deposits the funds into the company's account.
Present Value
Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return.
Money Market Securities
Short-term debt instruments, commonly including treasury bills, commercial paper, and certificates of deposit, known for their liquidity and low-risk profile.
- Comprehend the financial and operational improvements associated with a lockbox system, including decreased time for collections and improved efficiency.
- Determine the monetary consequences and feasibility of implementing cash management solutions like lockbox services or adjusting investment allocations.
Verified Answer
MK
Macey KessingerMay 05, 2024
Final Answer :
E
Explanation :
The present value of adopting the system can be calculated as follows:1. Calculate the total amount collected daily: 900 payments * $425 = $382,5002. Calculate the daily interest earned by reducing collection time by 4 days: $382,500 * 0.02% = $76.503. Calculate the total interest earned over 4 days: $76.50 * 4 = $3064. Calculate the total lockbox fees: 900 payments * $0.15 = $1355. Calculate the net benefit per day: $306 - $135 = $1716. Since the interest is compounded daily, the present value of adopting the system over a year (365 days) would be: $171 * 365 = $62,415However, the calculation provided above does not match any of the options given, indicating a misunderstanding in the calculation process. The correct approach to calculate the present value of adopting the system should consider the total value of payments accelerated by the lockbox system and the cost of the lockbox system, not just the daily interest and fees. The correct calculation involves determining the value of accelerating the receipt of payments by 4 days and subtracting the total cost of the lockbox system over the period considered. Without the correct formula and calculation based on the options provided, it's clear there was a mistake in the initial explanation. The correct approach should involve calculating the total value of payments that are accelerated (900 payments * $425 each * 4 days) and applying the daily interest rate to this amount to find the total interest savings, then subtracting the cost of the lockbox system (900 payments * $0.15 * number of days considered, if applicable). However, without the precise calculation steps that align with the options provided, the initial explanation is incorrect. The question seems to require a calculation that directly relates to the options given, which are not achieved with the explanation provided.
Learning Objectives
- Comprehend the financial and operational improvements associated with a lockbox system, including decreased time for collections and improved efficiency.
- Determine the monetary consequences and feasibility of implementing cash management solutions like lockbox services or adjusting investment allocations.