Problem:
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 $129,000, and the required rate of return is 4 percent per year. Assume 365 days per year.
Required:
Question 1: What is the reduction in outstanding cash balances as a result of implementing the lockbox system?
Question 2: What is the daily dollar return that could be earned on these savings?
Note: Please show how you came up with the solution.