If they accept this lock box offer, it will cost $80,000 per year. The savings from the system will be calculated as follows: sales per day are $250,000 ($90,000,000 ÷ 360), and the company will collect payments three days faster. This will increase their average cash balance by $750,000 ($250,000 × 3). The interest earned over the year on this amount is only $60,000 ($750,000 × 8%). Since the cost of the system is $20,000 more than the benefits from the system, Foster should not implement the system.
$140,000 is the sum of the cost of the lockbox and the interest to be earned from having the additional investable funds. The net benefit or loss of the lockbox system is the difference between the two amounts, not their sum.
$60,000 is the amount of additional interest that is earned during the period. See the correct answer for a complete explanation.
$60,000 is the amount of interest the company will earn on the additional investable funds. However, the company will have a cost for the lockbox that will offset the additional interest.
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