Course Code: FIN427

Course Title: Corporate Finance ||

Course Section: 1

Homework Number: 2

Student Name: Naima Hossain

Student ID number: 17304091

Date of Submission

23rd July, 2020

Problem 1

Here,

Float reduction = 1.5 days + 0.5 days of processing

= 2 days

Average remittance = $1, 00,000 and average of = $1,000

Average number of checks proceed per day = $1, 00,000/ $1,000

= 100 checks

Bank charge = $ 0.30/ check

Work day = 270, opportunity = 5%

Cost of lockbox = 100 checks X $0.30/ check X 270 days

= $8,100

Opportunity cost of the lockbox = $1, 00,000 X 2 days X 5%

= $10,000

So, the annual savings are $10,000, which is more than $8,100 cost of the lockbox.

Therefore, Simon should keep the lockbox.