It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi

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 $126,000, and the required rate of return is 4 percent per year. Assume 365 days per year.

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?

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?

Explanation / Answer

c-1)

if the payment is due at the end of the month

Reduction in outstanding cash balances = 126000*(6-3) = $ 378,000

Maximum monthly charge = Reduction in outstanding cash balances*((1+r)^(1/12)- 1)

Maximum monthly charge = 378000*((1+4%)^(1/12) -1)

Maximum monthly charge = $ 1237.47

c2)

if the payment is due at the beginning of the month

Maximum monthly charge = Reduction in outstanding cash balances *((1+r)^(1/12)- 1) / (1+ ((1+r)^(1/12)- 1))

Maximum monthly charge = 378000*((1+4%)^(1/12) -1)/(1+((1+4%)^(1/12) -1))

Maximum monthly charge = $ 1233.44

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