Holooly Plus Logo
Holooly Plus Logo

Question 20.4: In our example concerning the Atlantic Corporation’s propose...

In our example concerning the Atlantic Corporation’s proposed lockbox system, suppose the 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?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

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 = 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.

Related Answered Questions

Question: 20.4

Based on our previous two examples, what size orders should Thiewes place to minimize costs? How often will Thiewes restock? What are the total carrying and restocking costs? The total costs? ...

Verified Answer:

We know that the total number of pairs of boots or...
Question: 20A.1

The Vulcan Corporation has cash outflows of $100 per day, seven days a week. The interest rate is 5 percent, and the fixed cost of replenishing cash balances is $10 per transaction. What is the optimal initial cash balance? What is the total cost? ...

Verified Answer:

The total cash needed for the year is 365 days × $...
Question: 20ARS-TP1

Given the following information, calculate the target cash balance using the BAT model at are the opportunity cost of holding cash, the trading cost, and the total cost? What would these be if $15,000 were held instead? If $25,000 were held? ...

Verified Answer:

From the BAT model, we know that the target cash b...
Question: 20CRS-TP1

On a typical day, a firm writes checks totaling $3,000. These checks clear in seven days. Simultaneously, the firm receives $1,700. The cash is available in two days on average. Calculate the disbursement, the collection, and the net floats. How do you interpret the answer? ...

Verified Answer:

The disbursement float is 7 days × $3,000 = $21,00...
Question: 20.1

Suppose you have $5,000 on deposit. One day, you write a check for $1,000 to pay for books, and you deposit $2,000. What are your disbursement, collection, and net floats? ...

Verified Answer:

After you write the $1,000 check, you show a balan...
Question: 20.3

Look back at Example 20.2. A large bank is willing to provide the float reduction service for $175 per year, payable at the end of each year. The relevant discount rate is 8 percent. Should Lambo hire the bank? What is the NPV of the investment? How do you interpret this discount rate? What is the ...

Verified Answer:

The PV to Lambo is still $2,000. The $175 would ha...
Question: 20.2

Instead of eliminating the float, suppose Lambo can reduce it to one day. What is the maximum Lambo should be willing to pay for this? ...

Verified Answer:

If Lambo can reduce the float from three days to o...