### Analysis of Regional Lockbox System for Whitmer Inc.Whitmer Inc. serves customers across the United States, with all receipts processed at its headquarters in New York City. The company's average accounts receivable balance is $2.5 million, which is financed through a bank loan at an annual interest rate of 11%. The firm is evaluating the implementation of a regional lockbox system aimed at accelerating collections, which is anticipated to reduce the receivables by 20%.### Key Details:- **Current Average Receivables**: $2.5 million- **Annual Interest Rate**: 11%- **Proposed Receivables Reduction**: 20%- **Annual Cost of Lockbox System**: $15,000### Calculation of Pre-Tax Net Annual Savings:1. **Reduction in Receivables**: \[ \text{Reduction} = $2,500,000 \times 20\% = $500,000 \]2. **Annual Interest Savings**: \[ \text{Annual Interest Savings} = $500,000 \times 11\% = $55,000 \]3. **Net Annual Savings**: \[ \text{Net Annual Savings} = \text{Interest Savings} - \text{Cost of Lockbox} = $55,000 - $15,000 = $40,000 \]By implementing the lockbox system, Whitmer Inc. would realize a pre-tax net annual savings of $40,000, accounting for the reduction in interest costs less the annual expense of the lockbox system. **Note**: This solution assumes that the operational efficiency gained from the lockbox system does not incur any additional hidden costs or savings beyond those identified.

Lockbox System - It is a technique of management of mailing float. There are certain advantage of…

Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized? (Hint: Lockbox will reduce annual average balanc of account receivable which in turn save annual interest costs. Compare this savings with the annual lockbox cost)

Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized? (Hint: Lockbox will reduce annual average balanc of account receivable which in turn save annual interest costs. Compare this savings with the annual lockbox cost)

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

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