Jim Heston has been working on Austin Paints\' cash budget for the coming year.

Question

Jim Heston has been working on Austin Paints' cash budget for the coming year. Based on his projections for March, the beginning cash balance will be $50,089; cash collections will be $700,000; and cash disbursements will be $710,380. Austin Paints desires to maintain a $50,000 minimum cash balance. The company has a 10 percent open line of credit with its bank, which provides short-term borrowings in $500 increments. All borrowings are made at the beginning of the month, and all repayments are made at the end of the month (in $500 increments). Accrued interest is paid at the time of repayment. (a) How much will Austin Paints need to borrow from the bank at the beginning of March? Austin Paints should borrow $ (b) Assuming that Austin Paints has $7,000 in excess cash budgeted for April, how much principal will the company plan to repay? How much interest will be repaid in April? (Round interest repaid answer to the nearest whole dollar amount, e.g. 5,275.) Principal to be repaid $ Interest to be repaid $

Explanation / Answer

The given problem has been solved by taking the following assumptions:

That the given rate of interest for open line credit is on per annum basis i.e., 10% p.a. Thus interest to be served per month would be 0.83% of the borrowed amount.

That the excess cash in month of April $7000 is before serving interest on the open line credit and after maintaining the minimum balance required to be maintained.

Part (a)

Statement showing calculation of the amount to be borrowed in beginning of March:

Thus the company shall borrow $10500 in the beginning of march.

Verification:

Part (b)

Calculation of principal repayment in April

(-) Interest on borrowings to be paid in April {(10500*10%) / 12}

Amount in $ Opening Cash balance 50089 (+) Expected Receipts 700000 (-) Expected Payments 710380 (-) Minimum closing balance required at month end 50000 Approx. amount to be borrowed before interest thereon 10291 Appox. interest to served {(10291*10%) / 12} 86 Approx. amount to be borrowed after interest thereon 10377 Nearest increment in above amount(in $500) 10500

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