Question

TTT Inc., a moderately profitable producer of beauty supplies, has been in business since the 1960s and has been selling its products through its retailer network. Your company is considering launching several new products. Retailer remittances have grown to an average of $200,000 each business day, with additional collections of $1,250,000 a day for every 4 days following the special occasions of Valentine’s Day, Mother’s Day, 24th of June, and Christmas Day. TTT Inc. employed you as a financial analyst. You have been assigned to perform due diligence for this potential investment by conducting risk-assessment procedures. The company is continuing to expand its network of retail outlets and introduce new lines of consumer products, expecting continued growth for the coming years. One of your responsibilities is to direct TTT’s cash management function. The company has centralized operations and you found that retailer remittances take an average of 5 mail days to reach the company, and an additional two days are needed for in-house processing before bank deposits are made. Immediately, after these findings, you have investigated various regional lockbox arrangements as a means to accelerate this cash collection process. Considering a three-bank system in different locations in the country, mail times could be reduced by two days. The in-house check processing would be eliminated. The banks would provide the company with a listing of daily transactions and any supporting documents that retailers submit with payments. The lockbox service charges would be $1,000 per month for each bank, and it is estimated that 6% interest could be earned on short-term investments. You have considered various ways of investing available funds, including the use of marketable securities. This is important during the peak periods when cash inflows are large.

a. Analyze whether the company should implement a lockbox system by preparing an analysis using a 360-day year.