Amount of funds-lockbox arrangement

Reference no: EM1344458

J-Mart, the nationwide department store chain, processes all its credit sales payments at its suburban Detroit headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from its southeastern region. Annual credit sales collections from the region are $60 million. The establishment of the lockbox system would reduce mailing, processing, and check-clearing time from 8 days currently to 3.5 days, reduce company processing costs by $25,000 per year, and reduce the compensating balance of its Detroit bank by $200,000. The Atlanta bank would not charge any fee for the lockbox service but would require J-Mart to maintain a $500,000 compensating balance. Funds released by the lockbox arrangement could be invested elsewhere in the firm to earn 15 percent before taxes.

Find out the following:

a. The amount of funds released by the lockbox arrangement

b. The annual (pretax) earnings on the released funds

c. The annual net (pretax) benefits to J-Mart of establishing the lockbox system with the Atlanta bank

Reference no: EM1344458

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