FIN419 Week4 Text - Problem1:

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American Steel and Rubber feels that a lockbox system can shorten its accounts receivab period by 2 days.  Credit sales are $3,000,000 per year, billed on a continuous basis.  Th equally risky investments with a return of 15%.  The cost of the lockbox system is $9,000 a) What amount of cash will be made available for other uses under the lockbox system? Answer: Cash available $3,000,000  ÷ 365 x = $8,219.18  x 2 = $16,438.36  b) What net benefit (cost) will the firm realize ifit adopts the lockbox system? Should it adopt proposed lock box system? Answer: Interest income from reinvesting the cash available = $16,438.36  x 15 ÷ = $16,438.36  x 0.15 = $2,465.75  Lockbox cost  $9,000  Net benefit = $2,465.75  - $9,000  = American Steel and Rubber should not initiate the lockbox system since it firm $6,534.25 more than it will earn on the freed funds. ( Note:
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This note was uploaded on 08/22/2011 for the course BUS 415 taught by Professor Barnes during the Spring '11 term at Coastal Carolina University.

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FIN419 Week4 Text - Problem1:

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