Should xyz switch to the lockbox

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Reference no: EM131910095

XYZ Company is trying to determine whether or not it should move the processing of incoming payments from their own processing center to a lockbox. Annual collections are $165 million on 45,000 items.

XYZ estimates that by using a lockbox it will decrease total collection float by 3 days.

XYZ also estimates that their costs to process payments themselves run about $1 per an item and that by moving these collections to a lockbox it would increase costs to $2 an item, plus $12,000 in fixed costs.

If the relevant cost of capital is 5.5%, should XYZ switch to the lockbox?

Reference no: EM131910095

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