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 $122,000, and the required rate of return is 5 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? Cash balance reduction $ b. What is the daily dollar return that could be earned on these savings? (Round your 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? (Round your answer to 2 decimal places. (e.g., 32.16)) Maximum monthly charge $ c-2 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)) Maximum monthly charge $

Explanation / Answer

Answer a

Collection of 6 days => 122000 * 6 => $732000

Less: Collection of 3 days => 122000 * 3 => $366000

Total reduction => $ 732000 - $ 366000 => $366000

Answer b

First, figure the average daily rate: (1+r)(1/365)-1 = 1.05(1/365)-1 = .00013368

Daily dollar return that could be earned on these savings => 366000 * 0.00013368 => $48.93

Answer c-1

Conversion of annual required rate of return to monthly => (1+5%)1/12 -1 => 0.4073%

So maximum monthly charges if payment is made at the end of month by using the perpetuity formula to solve =>

366000 => C / 0.004073

C => 360000 * 0.004073

=> $1490.718 or $1491

Answer c-2

Maximum monthly charges if payment is made at the beginning of month =>

C => (PV * r) / (1+r)
C => (366000* 0.0040403) / 1.0040703
C => 1484.67 or $1485

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