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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

LOCKBOX SYSTEM Fisher-Gardner Corporation (FGC) began operations 5 years ago as a small firm serving customers in the Chicago area. However, its reputation and market area grew quickly. Today FGC has customers all over the United States. Despite its broad customer base, FGC has maintained its headquarters in Chicago, and it keeps its central billing system there. On average, it takes 7 days from the time customers mail in payments until FGC can receive, process, and deposit them. FGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 2 days––bringing it down to 5 days. FGC receives an average of $2,300,000 in payments per day.

  1. a. How much free cash would FGC generate if it implemented the lockbox system? Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? How would growth affect your answer?
  2. b. If FGC has an opportunity cost of 6%, how much is the lockbox system worth on an annual basis?
  3. c. What is the maximum monthly charge FGC should pay for the lockbox system?

a.

Summary Introduction

To determine: The free cash generated if the lockbox system is implemented, the frequency of the cash generated and the effect of the growth.

Introduction:

Lockbox Collection System: The lockbox collection system is that system in which the firms direct their customers to send the payments through a lockbox which is operated by a bank. The customers of a firm can send payments through these lockboxes. This system is used so that the receipt of the cash by the sellers can be collected fast.

Explanation

Given information:

The payments per day on an average are $2,300,000.

The present collection period is of 7 days.

After the implementation of the lockbox, the collection period would be 5 days.

Calculation of the free cash generated:

The formula to calculate the free cash generated is,

Freecash=(Collectionfor7daysCollectionfor5days)

Substitute $16,100,000 for the cash collection for 7 days (working note) and $11,500,000 for the cash collection for 5 days (working note) in the above formula.

Freecash=$16,100,000$11,500,000=$4,600,000

The free cash generated is $4,600,000

b.

Summary Introduction

To determine: The worth of the lockbox system on a yearly basis if the opportunity cost is 6%.

c.

Summary Introduction

To determine: The highest monthly charge for the lockbox system.

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