Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days-bringing it down to 2 days. HGC receives an average of $1,400,000 in payments per day. a. How much free cash would HGC 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? b. If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis?
Hardin-Gehr Corporation (HGC) began operations 5 years ago as a small firm serving customers in the Detroit area. However, its reputation and market area grew quickly. Today HGC has customers all over the United States. Despite its broad customer base, HGC has maintained its headquarters in Detroit and it keeps its central billing system there. On average, it takes 5 days from the time customers mail in payments until HGC can receive, process, and deposit them. HGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 3 days-bringing it down to 2 days. HGC receives an average of $1,400,000 in payments per day. a. How much free cash would HGC 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? b. If HGC has an opportunity cost of 10%, how much is the lockbox system worth on an annual basis?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Help
Transcribed Image Text:Hardin-Gehr Corporation (HGC) began operations 5
years ago as a small firm serving customers in the
Detroit area. However, its reputation and market area
grew quickly. Today HGC has customers all over the
United States. Despite its broad customer base, HGC
has maintained its headquarters in Detroit and it
keeps its central billing system there. On average, it
takes 5 days from the time customers mail in
payments until HGC can receive, process, and deposit
them. HGC would like to set up a lockbox collection
system, which it estimates would reduce the time lag
from customer mailing to deposit by 3 days-bringing
it down to 2 days. HGC receives an average of
$1,400,000 in payments per day.
a. How much free cash would HGC 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?
b. If HGC has an opportunity cost of 10%, how much is
the lockbox system worth on an annual basis?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education