Question

It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. The company’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 $147,000, 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?
b.	What is the daily dollar return that could be earned on these savings? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c-1.	What is the maximum monthly charge the company 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 answer to 2 decimal places, e.g., 32.16.)
c-2.	What is the maximum monthly charge the company 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 answer to 2 decimal places, e.g., 32.16.)

      

Answer 1

a.	What is the reduction in outstanding cash balances as a result of implementing the lockbox system? answer = 3 days x $147,000 = $441,000

b.	What is the daily dollar return that could be earned on these savings? First we find the average daily rate: (1+r)^(1/365)-1 = 1.06^(1/365)-1 = .000159654 Now multiply: $441000 x .000159654 = $70.407, or $70.41 rounded

c-1.

What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the end of the month? answar First, you need to convert the annual rate to a monthly rate: (1+r)^(1/12)-1 = 1.06^(1/12)-1 = 0.0048676 For c1 use the perpetuity formula to solve PV = c / r 441,000 = c / .0048676 441,000*.0048676 = c 21466.6116 or c= $21466.61

c-2.	What is the maximum monthly charge the company should pay for this lockbox system if the payment is due at the beginning of the month? answer; we use the perpetuity due formula to solve: c = (PV * r) / (1+r) c = (441,000*.0048676) / 1.0048676 c = $2145.5672 Or rounded $2145.57