Question 1 If you invest $25 582 today at an interest rate of 3.5 percent compounded annually how.

QUESTION

Question 1If you invest $25,582 today at an interest rate of 3.5 percent, compounded annually, how much money will you have in your savings account in 28 years?Question 2The Zindler Company currently has a centralized billing system. Payments are made by all customers to the central billing location. It requires, on average, four days for customers mailed payments to reach the central location. An additional day and a half is required to process payments before a deposit can be made. The firm has a daily average collection of $500,000. The company has recently investigated the possibility of initiating a lockbox system. It has estimated that with such a system customers mailed payments would reach the receipt location two and one-half days sooner. Further, the processing time could be reduced by an additional day because each lockbox bank would pick up mailed deposits twice daily.a. Determine how much cash would be freed up (released) through the use of a lockbox system.b. Determine the annual gross dollar benefit of the lockbox system, assuming the firm could earn a 5 percent return on the released funds in Part (a) by investing in short term instruments.c. If the annual cost of the lockbox system will be $75,000, should such a system be initiated?
Answer to 1 Investment today = $25,582 Interest rate = 3.5% Compunding frequency = Anually Tenure of savings = 28 years Money accumulated after 28 years = Investment * (1 + interest rate) ^ Tenure Or, Money accumulated after 28 years = $25,582 * (1.035)^28 = $67,029.24 Answer to 2 Part A Days required in the present centralized billing system to reach central location 4.0 Processing float 1.0 Total Days 5.0 Saving in days in reaching payment 2.5 Processing float savings 1.0 Saving in days 3.5 Daily Average Collection = $500,000 Reduction in Cash Balance

r cash freed up = Savings in Days * Daily Average Collection = 3.5 * $500,000 = $1,750,000 Part B Annual Gross Dollar Benefit of the Locakbox System = $1,750,000 * 5% = $87,500 Part C Annual Cost of the Lockbox System = $75,000 Since the cost of the lockbox system is less than opportunity cost of the present system, the system should be initiated.

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