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Lexicon has a daily average check collections of $180,000, and it takes the firm 5 days before it can completely process those checks. An automated lockbox system that costs $33,000 a year would reduce the processing time by 2 days. Should Lexicon invest in this system if the opportunity cost of short-term funds is 12.3%? Why or why not?

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hoangkhangpham94

Answer:

Lexicon should invest in the system. The reason why it should is shown in the explanation.

Explanation:

Give the investment is carried out, the reduction in processing time by 2 days will decrease the check outstanding by $360,000, which is calculated as average check collection daily x number of day processing time is reduced or 180,000 x2.

The opportunity cost saving from reduction in outstanding check = 360,000 x 12.3% = $44,280

The incremental benefit from investment =  Opportunity cost saving - Cost of the lockbox system = 44,280 - 33,000 = $11,280.

Thus, Lexicon should invest in the system as it save the company $11,280 each year.

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