Eagle Industries feels 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 with a return of 15%. The cost of the lockbox system is $9,000 per year.

Question

Eagle Industries feels 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 with a return of 15%.  The cost of the lockbox system is $9,000 per year.

anonymous · Answer

Basically, the amount they earn per day from credit sales is x = 3240000/365, and over 3 days they lose x amount of money by not receiving those accounts. So under the lockbox system they can put in 3x dollars to be use as they see fit. And they will use that to get a 15% return. So the amount they earn from the lockbox is 15% of 3x over those 3 days, and that minus the $9000 cost is the net benefit.