Cow Chips, Inc., a large fertilizer distributor based in California, is planning
ID: 2781397 • Letter: C
Question
Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $10,000 paid at the end of the year plus 10 cents per transaction. The estimated reduction in collection and processing time is one day. Treasury bills are currently yielding 5 percent per year and there are 365 days per year If the average customer payment in this region is $5,700, how many customers each day, on average, are needed to make the system profitable for Cow Chips? (Round your answer to 2 decimal places. (e.g., 32.16)) Number of customers per dayExplanation / Answer
Annual fee = $10000
Let the number of transactions per day be denoted by N
Total fees = $10000 + 0.1 * N * 365
Daily yield of treasury bills = (1+ tbill rate)1/365- 1 = 1.051/365 - 1 = 0.0001337
Amount of payments received in N transactions = $5700 * N
Net present value must equal zero at minimum number of transaction needed to become profitable
Therefore NPV = 0 = $5700 *N - 0.1 *N/ 0.0001337 - 10000/0.05
This equation gives N= 40.37