Asked by Diedre McCoy on Jul 15, 2024
Verified
The Stetson Co. receives an average of 340 checks a day. The average amount per check is $750. The firm is considering a lockbox system which it anticipates will reduce the average collection time by 2 days. The daily interest rate on Treasury bills is.006 %. What is the amount of the expected daily savings of the lockbox system?
A) $2.04
B) $9.00
C) $15.30
D) $18.00
E) $30.60
Lockbox System
A service provided by banks to companies for the receipt of payment from customers, where payments are sent to a special post office box rather than to the company.
Treasury Bills
Short-term government securities issued at a discount from their face value, with maturities ranging from a few days to 52 weeks.
Collection Time
The average duration it takes for a company to collect payments owed by its customers, often measured in days.
- Assess the monetary consequences of adopting a lockbox mechanism on collection periods and overall cash inflows.
Verified Answer
SG
Summer GaydenJul 15, 2024
Final Answer :
E
Explanation :
The expected daily savings from the lockbox system can be calculated by first determining the total value of checks received daily, which is 340 checks * $750 = $255,000. Reducing the collection time by 2 days means this amount can be invested 2 days earlier, earning daily interest. The daily interest savings are $255,000 * 0.006% * 2 = $30.60.
Learning Objectives
- Assess the monetary consequences of adopting a lockbox mechanism on collection periods and overall cash inflows.