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 $138,000, and the required rate of return is 4 percent per year. Assume 365 days per year.

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

1) Average Daily Collection = $138000

Reduction time in receipt and deposite = 6 days -3 days = 3 days

Reduction in Outstanding Cash balance = 138000 x 3 = $414000

b) daily dollar return =Average interrest daily rate x cash balance reduction

Find Average Daily rate

Average Daily rate = (1+r)^(1/365)-1

Average Daily rate = (1+4%)^(1/365)-1 = (1.04)^(0.00274)-1

Average Daily rate = 1.000107-1 = 0.000107

Daily Dollar return = 0.000107 x 414000 = $44.49

c) a - Maximum Mnthly charge if Payment due at the end of the month

Convert the rate to monthly rate

maximum monthly charge = montly rate x cash balance reduction

= (1+r)^(1/12)-1

=(1+4%)^(1/12)-1 = (1.04)^(0.083333)-1

= 1.003274 - 1 = 0.003274

=414000x 0.003274 = $1355.44

c-2) If Payment is due at the beginning of the month use the formula

payment at the end of the month / (1+r)

1355.44/1.04 =$1303.31

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