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 $123,000, and the required rate of return is 4 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

$

No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4.2 million in collections a day and requires a $310,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so that two other banks will handle its business. Banks A and B will each handle $2.1 million of collections a day, and each requires a compensating balance of $160,000. No More Books’ financial management expects that collections will be accelerated by one day if the eastern region is divided.

What is the NPV of accepting the system?

NPV

$

What will be the annual net savings? Assume that the T-bill rate is 2.4 percent annually.

Annual net savings

$

Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 2.0 days. Assume 365 days a year.

Average number of payments per day		810
Average value of payment	$	760
Variable lockbox fee (per transaction)	$	0.20
Annual interest rate on money market securities		5.0	%

What is the NPV of the new lockbox system?

NPV

$

Suppose in addition to the variable charge that there is an annual fixed charge of $4,000 to be paid at the end of each year. What is the NPV now? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

NPV

$

Answer 1

Only Question 1 answered as per the Answering Policy:

1.a) reduction in outstanding cash balance would the amount of collection which occurs in 6 - 3 = 3 days. i.e.number of days the time period is reduced. Each day collection is $123,000. Therefore, total reduction =$369,000

1.b) If $369,000 was invested at 5% per annum, then per day earnings would be = 369000*4% / 365 = $40.44

1.c1) The maximum amount the company should pay for the lockbox should not exceed the amount the company can earn in interest from the savings they make by using the lockbox. Since the amount of savings they make is $369,000, assuming interest rate of 4%, the maximum amount they should pay = $369,000 * 4%/12 (1 Month Interest) = $1,230

1.c2) If the money is paid at the beginning of the month, then the amount needs to be discounted for 1 month. Therefore, maximum money which should be paid is = $1,230/(1+4%/12) = $1,225.91