It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi
ID: 2769284 • 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 days total. Average daily collections are $125,000, and the required rate of return is 5 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))
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 $125,000, and the required rate of return is 5 percent per year. Assume 365 days per year.
Explanation / Answer
a. What is the reduction in outstanding cash balances as a result of implementing the lockbox system? Collection of 6 days 125,000 X 6 750,000 Collection of 3 days 125,000 X 3 375,000 Total reduction 375,000 b. What is the daily dollar return that could be earned on these savings? Reduction in Float X requied rate of return 375,000 X 0.0134% = 50 Average daily rate = 1.05^1/365 – 1 Average daily rate = 0.0134% per day c. 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 payment is due at the beginning of the month? Conversion of annual required rate of return to monthly (1+5%)^(1/12)-1 0.004074124 So maximum monthly charges of 32084 if payment is made at the end of month 0 (375,000) 1 32,084 2 32,084 3 32,084 4 32,084 5 32,084 6 32,084 7 32,084 8 32,084 9 32,084 10 32,084 11 32,084 12 32,084 NPV (0) So maximum monthly charges of 31,954 if payment is made at the beginning of month 0 (343,046) 1 31,954 2 31,954 3 31,954 4 31,954 5 31,954 6 31,954 7 31,954 8 31,954 9 31,954 10 31,954 11 31,954 12 - NPV (0) Annuity $ -32,083.70 PMT(0.4074%,12,375000) Annuity Due $ -31,953.52 PMT(0.4074%,12,375000,,1)
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