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. The cash balance is $408,000

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))

Explanation / Answer

1)Reduction in outstanding cash balances as a result of implementing the lockbox system

3 days x $136000 = $408000

1) What is the daily dollar return that could be earned on these savings? (Round your answer to 2 decimal places

First, figure the average daily rate: (1+r)^(1/365)-1 = 1.05^(1/365)-1 = 0.00013

     Now multiply: $408000 x .00013 = $54.54,

2)

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?

First, you need to convert the annual rate to a monthly rate: (1+r)^(1/12)-1 = 1.05^(1/12)-1 = 0.004074124

For c1 use the perpetuity formula to solve:

PV = c / r

408000 = c / 0.004074124

408000*0.004074124= c

C =1662.24

3)

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

For c2, use the perpetuity due formula to solve:

c = (PV * r) / (1+r)

c = (408000*0.004074124) / 1.004074124

c = 1655.5

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