Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 16, Problem 9P
a.
Summary Introduction
To determine: The free cash generated if the lockbox system is implemented, the frequency of the cash generated and the effect of the growth.
Introduction:
Lockbox Collection System: The lockbox collection system is that system in which the firms direct their customers to send the payments through a lockbox which is operated by a bank. The customers of a firm can send payments through these lockboxes. This system is used so that the receipt of the cash by the sellers can be collected fast.
b.
Summary Introduction
To determine: The worth of the lockbox system on a yearly basis if the
c.
Summary Introduction
To determine: The highest monthly charge for the lockbox system.
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Ralph Taylor, a nationwide department store chain, currently processes all of its credit sales payments at its St. Louis headquarters. The firm is considering the establishment of a lockbox arrangement with a Los Angeles bank to process payments from its customers in 10 western states.
With the lockbox system, average mailing time for customers from this region would be reduced from 4 days to 1 day. Check-clearing time would also be reduced from 4 days to 1 day. Annual collections from the western region are $285 million. Establishment of this lockbox system would reduce the compensating balance requirement at the firm's St. Louis bank by $350,000 and reduce annual payment processing costs at the St. Louis office by $75,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 5% before taxes. The Los Angeles bank has agreed to process Ralph Taylor's customer payments for an annual fee of $185,000.
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Currently James Corporation is using a decentralized collection system whereby customers mail their checks to one of the firm’s eight regional locations. Its annual sales are $150 million. Checks are deposited each business day in a local bank and the amount of the deposit is sent to the firm’s concentration bank in Dallas. The average time between deposit in the local bank and the availability of those funds, in Dallas, to Riley is 6 days. James has determined that the use of wire transfers would reduce the float by four days, but the transfer will cost $15.00. If transfers will be made on each of the 250 days that banks are open, should Riley switch to the wire transfer system? Assume that James can earn 6% on the funds released through this more efficient transfer.
1. 2. Express Drugs RX operates a Mail order pharmaceutical business in New Jersey the firm receives an average of $325,000 in payments per day on average it takes 4 days from the time customers mail their checks until the firm receives them. The company is considering establishing a lock box system, in which customers payments would be sent to nearby banks local in terms of the purchasers instead of directly to New Jersey banks in the lock box locations would then wire the daily receipts to a single (concentration) bank.
The lock box system which would consist of 10 local depository banks and a concentration bank would cost Express Drugs RX a total of $8,500 per month under the system customers’ checks would be received at the tent lock box locations one day after they are mailed and the daily total from each of the 10 lockboxes locations would be wired to the concentration bank at a cost of $11.75 per transfer
Assume the firm could earn 10% on short-term…
Chapter 16 Solutions
Fundamentals of Financial Management (MindTap Course List)
Ch. 16 - What are some pros and cons of holding high levels...Ch. 16 - Prob. 2QCh. 16 - What are the two definitions of cash, and why do...Ch. 16 - Prob. 4QCh. 16 - What are the four key factors in a firm's credit...Ch. 16 - Prob. 6QCh. 16 - Why is some trade credit called free while other...Ch. 16 - Define each of the following loan terms, and...Ch. 16 - Why are accruals called spontaneous sources of...Ch. 16 - Indicate using a (+), (), or (0) whether each of...
Ch. 16 - CASH CONVERSION CYCLE Parramore Corp has 12...Ch. 16 - RECEIVABLES INVESTMENT Leyton Lumber Company has...Ch. 16 - COST OF TRADE CREDIT AND BANK LOAN Lancaster...Ch. 16 - Prob. 4PCh. 16 - RECEIVABLES INVESTMENT McEwan Industries sells on...Ch. 16 - WORKING CAPITAL INVESTMENT Pasha Corporation...Ch. 16 - Prob. 7PCh. 16 - CURRENT ASSETS INVESTMENT POLICY Rentz Corporation...Ch. 16 - Prob. 9P
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