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 $159,000, 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

1. What is the reduction in outstanding cash balances as a result of implementing the lockbox system?

Reduction in outstanding cash balances = Reduction in days * Daily Collections

Reduction in outstanding cash balances = 3 * 159000

Reduction in outstanding cash balances = $477000

2. What is the daily dollar return that could be earned on these savings?

Daily Dollar Return = Reduction in Cash Balance * [(1 + Interest)^(1/365)-1]

Daily Dollar Return = $477000 * [(1 + 0.06)^(1/365)-1]

Daily Dollar Return = $477000 * 0.000159654

Daily Dollar Return = $76.15

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?

Maximum Monthly Charge = Reduction in Cash balance * [(1 + Interest)^(1/12) - 1]

Maximum Monthly Charge = $477000 * [(1 + 0.06)^(1/12) - 1]

Maximum Monthly Charge = $2321.82

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?

Maximum Monthly Charge = (Reduction in Cash balance * Interest rate per Month) / (1 + Monthly Interest rate)

Maximum Monthly Charge = [$477000 * 0.004868] / (1.004868

Maximum Monthly Charge = $2310.57

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