It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi

Question

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce receipt and deposit times to three days total. Average daily collections are $136,000, and the required rate of return is 5 percent per year. Assume 365 days per year. Cash balance reduction is 408,000

What is the reduction in outstanding cash balances as a result of implementing the lockbox system?

What is the daily dollar return that could be earned on these savings? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the end of the month? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the maximum monthly charge Cookie Cutter should pay for this lockbox system if the payment is due at the beginning of the month? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the reduction in outstanding cash balances as a result of implementing the lockbox system?

Explanation / Answer

Question b Average Daily Collection 136000 Current Collection Days 6 Average collection 136000 Improved Collection days 3 Improved Average Collection 272000 Extra Collection 136000 interest @5% for 3 days 19.10112 Answer: $ 19.10 Question c1 Mothly Maximum charge will be 573.03 (30 days x $ 19.10 if paid at the end of the Month) Question c1 If amount is payable at the beginning of the month, Cookie cutter will pay amount equal to the Present Value discounted at 5%. PV factor Present Day Daily interest at 5% Value 1 19.1 0.999863 19.09851 2 19.1 0.999726 19.09589 3 19.1 0.999589 19.09328 4 19.1 0.999452 19.09066 5 19.1 0.999315 19.08805 6 19.1 0.999178 19.08543 7 19.1 0.999042 19.08282 8 19.1 0.998905 19.08020 9 19.1 0.998768 19.07759 10 19.1 0.998631 19.07498 11 19.1 0.998494 19.07236 12 19.1 0.998358 19.06975 13 19.1 0.998221 19.06714 14 19.1 0.998084 19.06453 15 19.1 0.997947 19.06192 16 19.1 0.997811 19.05931 17 19.1 0.997674 19.05670 18 19.1 0.997537 19.05409 19 19.1 0.997401 19.05148 20 19.1 0.997264 19.04887 21 19.1 0.997128 19.04626 22 19.1 0.996991 19.04365 23 19.1 0.996854 19.04104 24 19.1 0.996718 19.03843 25 19.1 0.996581 19.03583 26 19.1 0.996445 19.03322 27 19.1 0.996308 19.03061 28 19.1 0.996172 19.02800 29 19.1 0.996036 19.02540 30 19.1 0.995899 19.02279 Total 571.8188 Answer: $571.82

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