Question

AU Corp. is considering a lockbox system that would reduce its float by two days. Collections average $125,000 per day. The interest rate is 6 percent per year and the bank charges $10 per day for the lockbox system. How much will AU Corp. save per day by having the lockbox?

Answer 1

AU Corp. will save $51 per day by having the lockbox system.

Step-by-step explanation:

To calculate how much AU Corp. will save per day by having the lockbox, we need to consider the reduction in float and the costs associated with the lockbox system.

Given that the lockbox system would reduce the float by two days and that collections average $125,000 per day, the total reduction in float would be $125,000 x 2 = $250,000.

Now, let's calculate the interest cost of the float reduction. At an interest rate of 6% per year, the daily interest rate would be 6% / 365 = 0.0164% (rounded to four decimal places).

The interest cost of the float reduction would be $250,000 x 0.0164% = $41 (rounded to the nearest dollar).

Additionally, the bank charges $10 per day for the lockbox system. Therefore, AU Corp. would save $41 + $10 = $51 per day by having the lockbox system.