P15-15 Lockbox System

Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are
$3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The
of the lockbox system is $9,000 per year. (Note: Assume a 365-day year).

a. What amount of cash will be made available for other uses under the lockbox system?

Amount of cash = Annual credit sales x reduction in collection period

365

$3,240,000 x 3/365 = $ 26,630

The amount of cash to be made available for other uses under the lockbox system is $26,630.

b. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?

Net benefit = available cash x rate of return - cost of lockbox

26,630 x 15% -$9,000 = $ (5,005.48)

The net cost of the lockbox system is $5,005.48 therefore this is not beneficial and the firm should not adopt the proposed
lockbox system.
n period by 3 days. Credit sales are
nts that earn a return of 15%. The cost

pt the proposed lockbox system?

hould not adopt the proposed