Problem:

Your firm has an average receipt size of $175. A bank has approached you concerning a lockbox service that will decrease your total collection time by one day. You typically receive 5,900 checks per day. The daily interest rate is 0.016 percent. The bank charges a lockbox fee of $125 per day.

Required:

Question 1: What is the NPV of accepting the lockbox agreement?

Question 2: What would the net annual savings be if the service were adopted?

Note: Be sure to show how you arrived at your answer.