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 four days total. Average daily collections are $137,000, and the required rate of return is 6 percent per year. Assume 365 days per year. a.

What is the reduction in outstanding cash balances as a result of implementing the lockbox system? (Do not round intermediate calculations.) Cash balance reduction $

What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Dollar return $ c-1

. 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Maximum monthly charge $

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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Maximum monthly charge $

Explanation / Answer

Cash balance reduction:

Clolection for 6 days (6 * 137000) = 822000

Collection for 3 days (137000 * 3) = 411000

Reduction = 822000 - 41000 = 411000

b)

the average daily rate: (1+r)^(1/365)-1 = 1.06^(1/365)-1 = 0.943547

daily dollar return = 411000 * 0.943547 = 387798

C-1)

First, you need to convert the annual rate to a monthly rate: (1+r)^(1/12)-1 = 1.06^(1/12)-1 = 0.00947988

For C1 use the perpetuity formula to solve:

PV = c / r
411,000 = C / 0.00947988
411,000*0.00947988 = C
C = 3896.23

C-2)

C = (PV * r) / (1+r)
C = (411,000*.0.00947988) / 1.00947988
C =3859.64

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