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Question 19.4: In our example concerning Atlantic Corporation’s proposed lo...

In our example concerning Atlantic Corporation’s proposed lockbox system, suppose Pacific Bank wants a $20,000 fixed fee (paid annually) in addition to the 25 cents per check. Is the system still a good idea?

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To answer, we need to calculate the PV of the fixed fee. The daily interest rate is .025 percent. The annual rate is therefore 1.00025^{365} − 1 = .09553, or 9.553%. The PV of the fixed fee (which is paid each year forever) is $20,000/.09553 = $209,358. Because the NPV without the fee is $400,000, the NPV with the fee is $400,000 − 209,358 = $190,642. It’s still a good idea.

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