Reference no: EM133071425

Cross Drugs currently fills mail orders from all over the U.S., and receipts come in to a head office 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 which 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?

(Hint: The company borrows cash to cover its A/R until it collects payment for the sale. But, with a continuing A/R balance, it must continue to borrow. However, if it can lower its A/R balance, it can reduce the Carrying Cost, or the interest it pays on the loan. If the regional lockbox system reduces the company's A/R balance, it can lower its annual Carrying Cost. What is the annual reduction in interest expense net of the cost of the lockbock system?)