[Anonymous]

The provided answer isn’t making sense to me here. If I earn 150k for for days I would have 600k. I would think that this amount would need to be multiplied by the annual interest of 4% earned for the 4 days out of the year. 600k x .00011 . Can anyone help out with this problem? Thanks for your help.

A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company’s collection time by four days at a monthly fee of $2,500. If money market rates average 4% during the year, the additional annual income (loss) from using the lockbox service would be:

A.

$6,000.

Correct B.

$(6,000).

C.

$12,000.

D.

$(12,000).

A lockbox is a method of cash management which expedites collection of receivables. This service, usually offered by a bank, reduces the company’s collection time this way: customers send payments to a post office box; for a monthly fee the bank picks up the checks and begins the clearing process even before the company has recorded the payment. The company thus has the use of the payment funds more quickly.

In this question, the daily cash receipts of $150,000 can earn interest for four days at the annual rate of 4%:

Interest = Principal x Rate x Time

= $150,000/day x .04/year x 4 days

= $24,000

The cost to the company is the monthly bank fee of $2,500. Net annual loss is:

$24,000 – ($2,500 × 12) = $24,000 – $30,000 = $(6,000)