Question:
A firm is evaluating whether to establish a lockbox system. The bank will charge $30,000 per year for the lockbox and the firm will save approximately $8,000 in internal processing costs. The firm estimates that the float will be reduced by three days if the lockbox system is put into place. Assuming that average daily cash receipts are $350,000 and short-term interest rates are 4%, what decision should the firm make regarding the lockbox system?
1. Do not establish the lockbox system because the net cost is $30,000.
2. Do not establish the lockbox system because the net cost is $22,000.
3. Establish the lockbox system because the net benefit is $12,000.
4. Establish the lockbox system because the net benefit is $20,000.