Foster, Inc., is considering implementing a lockbox collection system at a cost of $80,000 per year. Annual sales are $90 million, and the lockbox system will reduce collection time by 3 days. If Foster can invest funds at 8%, should it use the lockbox system? Assume a 360-day year.

Answer (C) is correct. The annual benefit (loss) from using the lockbox system is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, Foster’s average cash balance will increase by $750,000 [$90,000,000 × (3 days ÷ 360 days)]. Benefit (loss) = Interest earned – Cost = ($750,000 × 8%) – $80,000 = $60,000 – $80,000 = $(20,000