It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi
ID: 2450148 • 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 $128,000, 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 $128,000, and the required rate of return is 5 percent per year. Assume 365 days per year.
Explanation / Answer
a)This lock box system will reduce the average collection time from six days to 3 days.
Outstanding cash balance without lock box = 6 x 128,000
=768,000
Outstanding cash balance with lock box = 3 x 128,000
= 384,000
Reduction in cash balance = Outstanding cash balance without lock box - Outstanding cash balance with lock box
= 768,000 -384,000
= 384,000
b)
Daily return = Cash savings x annual rate/365
= 384,000 x5%/365
=52.60
c-1)
Maximum monthly charge will be equal to the amount of monthly interest earned on savings
Monthly charge = cash savings x annual rate / 12
= 384,000 x5%/365
= 1600
c-2) This will be the pv of 1600.
PV = FV/ (1+r)^n
= 1600/(1+0.05/12)^1
=1593.361
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