It takes Cookie Cutter Modular Homes, Inc about six days to receive and deposit
ID: 2767338 • Letter: I
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 day total. Average daily collections are $122000 and the required rate of return is 5 percent per year. Assume 365 day 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? 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? 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?Explanation / Answer
Reduction in outstanding cash balance
Their is 3 days reduction in collection time and daily cash collection is $122000.
Thus reduction= $122000*3
Reduction in outstanding cash balance= $366000
b) Daily $ returns earned on this savings
First, figure the average daily rate: (1+r)^(1/365)-1 = 1.05^(1/365)-1 = .000133681
Now multiply: $366000 x .000133681 = $48.927, or $48.93 rounded
C)
First, we need to convert the annual rate to a monthly rate: (1+r)^(1/12)-1 = 1.05^(1/12)-1 = 0.004074124
To find maximum monthly charge to be paid at the end of month we can use the perpetuity formula to solve:
PV = c / r
366000 = c / 0.004074124
366000*0.004074124 = c
c= 1491.129
Or rounded, 1491.13
D)
To find maximum monthly charge to be paid at the begiining of month we can use the perpetuity due formula to
c = (PV * r) / (1+r)
c = (366000*0.004074124) / 1.004074124
c = 1485.078
Or rounded, $1485.08
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