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It takes Cookie Cutter Modular Homes, Inc
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 $133,000, 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?
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.)
Expert Solution
a) Computation of Reduction in outstanding cash balances as a result of implementing the lockbox system:
Cash Balance Reduction = Average Daily Collections * Number of Days
= $133,000 * 3
Cash Balance Reduction = $399,000
b) Computation of Daily dollar return that could be earned on these savings:
Dollar Return = Cash Balance Reduction * [ ( 1 + Rate of Return )^(1/365) -1 ]
= $399,000 * [ ( 1 + 5% )^(1/365) -1 ]
= $399,000 * 0.00013368
Dollar return = $53.34
c-1) Computation of 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 = PV * Effective Monthly Rate
= $399,000 * [ ( 1 + 5% )^(1/12) - 1 ]
= $399,000 * 0.004074124
Maximum Monthly Charge = $1,625.58
c-2) Computation of 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 = $1,625.58 / ( 1 + 0.004074124 )
Maximum Monthly Charge = $1,618.98
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