The cash manager for a large kitchen appliance retailer has been approached by a bank representative offering to set up a lock-box collection system. Analysis of the firm’s receipts shows that, on average, the system will reduce collection time by 2 days. The firm receives approximately 2,500 checks per day with an average value of $600 per check. The bank would charge $0.28 per check for operating the system. The firm currently invests short-term funds at an average rate of 7%. How much would the firm gain or lose annually by entering the lock-box agreement?

Answer (B) is correct. The additional annual income (loss) from using the lockbox service is the excess (deficit) of interest earned on the early deposits over (under) the cost of the service. If the plan is adopted, the firm’s average cash balance will increase by $3,000,000 ($600 value per check × 2,500 checks received per day × 2 days). Benefit (loss) = Interest earned – Cost. Thus, the loss of $45,500 is calculated from the interest earned of $210,000 ($3,000,000 × 7%) minus the cost of $255,500 ($0.28 per check × 2,500 checks per day × 365 days in a year).