Problem 17-03 Collections Qtime Products believes that use of a lockbox system c
ID: 2723564 • Letter: P
Question
Problem 17-03
Collections
Qtime Products believes that use of a lockbox system can shorten its accounts receivable collection period by four days. The firm's annual sales, all on credit, are $65 million, billed on a continuous basis. The firm can earn 7% on its short-term investments. The cost of the lockbox system is $57,500 per year. Assume a 365-day year.
What amount of cash will be made available for other uses under the lockbox system? Round your answer to the nearest dollar.
$
What net benefit (or cost) will the firm receive if it adopts the lockbox system? If the answer is negative, use minus sign. Round your answer to the nearest dollar.
$
Should the firm adopt the proposed lockbox system?
Explanation / Answer
A. Cash available = ($65m/365) *4 = $712,329
B. Interest Income from Reinvesting the cash available = $712,329 *(7%) = $49863.03
Lockbox costs = $57,500
Net Benefit = $49863.03 - $57,500 = ($7636.97)