Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month.
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To calculate the annual savings, we need to calculate the interest saved by reducing the payment processing time with the lockbox arrangement and subtract the bank fee.
Step 1: Calculate the daily interest saved:
- Currently, payments received by the hospital are not deposited for six days on average.
- With the lockbox arrangement, the time will be reduced to one day.
- So, the hospital will save 5 days on average per payment.
- To calculate the daily interest saved, we divide the annual interest rate by 365 (days in a year): 8% / 365 = 0.021917808%.
Step 2: Calculate the total annual savings from interest:
- The annual net patient revenues of the hospital are $150 million.
- Multiply the daily interest saved by the net patient revenues to find the amount of interest saved per day: $150,000,000 * 0.021917808% = $32,877.40 per day.
- Multiply the daily interest saved by the number of days in a year (365) to find the total annual interest saved: $32,877.40 * 365 = $11,999,561.
Step 3: Subtract the bank fee:
- The bank fee is $2,000 per month.
- Multiply the bank fee by 12 to get the annual bank fee: $2,000 * 12 = $24,000.
Step 4: Calculate the final annual savings:
- Subtract the annual bank fee from the total annual interest saved: $11,999,561 - $24,000 = $11,975,561.
Therefore, the annual savings from implementing the lockbox arrangement, after subtracting the bank fee, will be $11,975,561.