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Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized

Sagot :

Tundexi

Answer:

$40,000

Explanation:

Average accounts receivables = $2,500,000. Loan amount is also $2,500,000.

Interest rate is 11%. So, interest paid = $2,500,000*0.11 = $275,000

If the system reduces receivables by 20%,then current receivables = $2,500,000*0.8 = $2,000,000. So,  loan amount = $2,000,000

Interest payable = $2,000,000*0.11 = $220,000

Cost of system = $15,000

Net annual savings = Interest payable without system - Interest payable after system installed - Cost of system

Net annual savings = $275,000 - $220,000 - $15,000

Net annual savings = $40,000

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