Jackson's Thriftway currently processes all of its credit sales at its Seguin, Texas, headquarters. The firm is considering establishing a lockbox arrangement with a Chicago bank to process payment form customers in 12 midwestern states. Average mailing time for customers from this region is currently 4 days. It is expected that the system will reduce this to 2.5 days. Check processing and clearing time would be reduced from 4 days to 1.5 days with the lockbox arrangement. Annual collections from this region are $200 million. The lockbox arrangement would reduce the compensating balance requirement at the firm's Seguin bank by $400,000 and reduce annual payment processing costs at the Seguin office by $25,000. Funds released by the lockbox arrangement can be invested elsewhere in the firm to earn 14 percent before taxes.
- The Chicago bank has agreed to process Jackson's customer payments for an annual fee of $130,000. Determine the annual net pretax benefits to Jackson's of establishing a lockbox system with the Chicago bank.
- The Chicago bank has agreed to process Jackson's customer payments "free of charge" if the firm maintains a minimum compensating balance of $2 million in its account at the bank. Determine the annual net pretax benefits to Jackson's of establishing the lockbox system under these conditions.