It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposi
ID: 2768073 • 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 $136,000, and the required rate of return is 5 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 $
Explanation / Answer
a. What is the reduction in outstanding cash balances as a result of implementing the lockbox system? Cash balance reduction $
Collection of 8 Days = $136,000 x 6 = $816,000
Collection of 3 Days = $136,000 x 3 = $408,000
Total Reduction = $816,000 - $408,000 = $408,000
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 $
Dollar Return = Reduction in Float x Required Rate of Return = $408,000 x 5% = $20,400
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 $
Conversion of annual required rate of return to monthly (1+5%)^(1/12)-1 0.004074 So maximum monthly charges of 51,826 if payment is made at the end of month 0 (4,08,000) 1 51,826 2 51,826 3 51,826 4 51,826 5 51,826 6 51,826 7 51,826 8 51,826 9 51,826 10 51,826 11 51,826 12 51,826 NPV 1,97,755Related Questions
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