Question

Prime Bank is offering your company the use of their lockbox services. They estimate that you can reduce your average mail time by 1.5 days and they can save you a combined clearing and processing time of 1 day by putting the checks into the clearing system sooner. Your firm receives 198 checks a day with an average value of $2,300 each. The current T-Bill rate is .011 percent per day. Assume a 365-day year. Prime Bank will charge your firm an annual fee of $27,500 plus $.20 per check. What is the annual net savings from installing this system

Answer 1

$3,756.77

Step-by-step explanation:

The computation of the annual net savings from installing this system is shown below

Given that

Reduction in average mail time= 1.5 days

And, Reduction in clearing and processing time = 1day

So, Total reduction = 1.5 + 1 = 2.5 days

No. of checks per day= 198

Average Value= $2300

So, the Value of all checks per day is

= 2300 × 198

= $455,400

Now total savings is

= $455,400 × 2.5 days × 0.00011 × 365 days

= $45,710.77

The Cost of service is

= Annual fee + variable fee

= $27,500 + 0.20 × 198 × 365

= $41,954

Now

finally Net savings is

= $45,710.77 - $41,954

= $3,756.77