Question

Fisher-Gardner Corporation (FGC) began operations 5 years ago as a small firm serving customers in the Chicago area. However, its reputation and market area grew quickly. Today FGC has customers all over the United States. Despite its broad customer base, FGC has maintained its headquarters in Detroit, and it keeps its central billing system there. On average, it takes 7 days from the time customers mail in payments until FGC can receive, process, and deposit them. FGC would like to set up a lockbox collection system, which it estimates would reduce the time lag from customer mailing to deposit by 1 days-bringing it down to 6 days. FGC receives an average of $2,500,000 in payments per day.

a. How much free cash would FGC generate if it implemented the lockbox system? Round your answer to the nearest dollar. $ _______

b. Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? ___________choose

c. How would growth affect your answer? If the firm grows, cash flow . (choose one)

either one-time cash flow

would increase by differential growth

would decrease by differential growth.

d. If FGC has an opportunity cost of 7%, how much is the lockbox system worth on an annual basis? Round your answer to the nearest dollar. $ ____

e. What is the maximum monthly charge FGC should pay for the lockbox system? Round your answer to the nearest cent. $ _________

Answer 1

solution Part a: free cash (7-6)*2500000 2500000 b. Would this be a one-time cash flow or a recurring one, assuming the company ceases to grow? one- time cash flow c. How would growth affect your answer? If the firm grows, cash flow. would increase by differential growth Part d: Annual worth of lockbox system-25200007% 175000 maximum monthly charge 175000/12 14,583.33