Question

It takes Cookie Cutter Modular Homes, Incorporated, 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 $163,000, and the required rate of return is 7 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.) a. Outstanding cash balance reduction $ 489,000 b. Daily dollar return $ 90.66 c-1. Maximum monthly charge c-2. Maximum monthly charge

Answer 1

a) Cash balance reduction= $399,000

b) Dollar return= $53.34

c) Maximum monthly charge end of each month = $1625.53

d) Maximum monthly charge beginning of the month = $1618.93

Step-by-step explanation:

Given:

•Average daily collections = $133,000

• Daily required rate of return = 5%

a) To find the cash balance reduction, we have:

3days * $133,000 = $399,000

b) let's use the frormula:

=

= 0.00013368

Therefore, the dollar return will be:

$399,000 * 0.00013368 = $53.33833

Dollar return = $53.34

c) we need to find the monthly rate:

= 1.004074 - 1 = 0.004074

Max monthly charge at end of month wil be:

$399,000 * 0.004074 = $1625.526

d)

1.004074 - 1 = 0.004074

Max monthly charge at beginning of the month:

= $1618.9305