What is the estimated net annual savings to the firm from i

Question

Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections that it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system?

Answer 1

Annual Interest savings due to a 20% reduction in A/R = 0.2 * 2,500,000 *0.11 = $55,000

Net Annual savings to the firm from implementing the lockbox system = 55,000 - 15,000 = $40,000