Your Company Is Thinking of Installing a Lockbox System in Toronto

question 278

Multiple Choice

Your company is thinking of installing a lockbox system in Toronto to collect payments from the Western Provinces. The collection time is currently five days and would be reduced to three days if
The system is installed. Daily interest on T-bills is .015%. The average number of daily payments is
650 and the average cheque size is $250. If the bank charges 6¢ per cheque, should the company
Get the lockbox?

• A) Yes, because the NPV is $97,500.
• B) Yes, because the NPV is $65,000.
• C) Since the NPV is zero, the firm is indifferent.
• D) No, because the NPV is -$65,000.
• E) No, because the NPV is -$97,500.

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Definitions:

Raw Materials Inventory

The stock of basic materials that are used in production but have not yet been processed.

Standard Costs

Predetermined or budgeted costs for materials, labor, and overhead, used as benchmarks to measure actual performance and manage costs.

Standard Costs

Standard costs are estimated expenses related to the production of goods or services under normal conditions.

Cost System

A method for accumulating and allocating costs to products or services.