RR’S CASH BUDGET FOR JANUARY AND FEBRUARY November December January February Mar
ID: 2575408 • Letter: R
Question
RR’S CASH BUDGET FOR JANUARY AND FEBRUARY
November December January February March April Sales
(1) Sales (Gross) $71,218 $68,212.00 $65,213.00 $52,475.00 $42,909 $30,524
Collections:
(2) During Month Of Sale
(0.2)(0.98)(Month’s Sales) 12,781.75 10,285.10 (
3) During First Month After Sale
0.7(Previous Month’s Sales) 47,748.40 4 5,649.10
(4) During Second Month After Sale
0.1(Sales 2 Months Ago) 7,121.80 6,821.20
(5) Total Collections (Lines 2 + 3 + 4) $67,651.95 $62,755.40
Purchases:
(6) 0.85(Forecasted Sales
2 Months From Now) $44,603.75 $36,472.65 $25,945.40
Payments
(7) Payments For Purchases 44,603.75 36,472.65
(8) Wages And Salaries 6,690.56 5,470.90
(9) Rent 2,500.00 2,500.00
(10) Taxes
(11) Total Payments $53,794.31 $44,443.55
Net Cash Flows
(12) Cash At Beginning Of Forecast $ 3,000.00
(13) Net Cash Flow: Collections – Payments $13,857.64 $18,311.85
(14) Cumulative NCF (Prior mos. + this mos. NCF) 16,857.64 35,169.49
Cash Surplus (or Loan Requirement)
(15) Target Cash Balance 1,500.00 1,500.00
(16) Surplus Cash Or Loan Needed $15,357.64 $33,669.49
PLEASE SHOW WORK
9. If the company reduces its inventory without adversely affecting sales, what effect should this have on the company’s cash position (1) in the short run and (2) in the long run? Explain in terms of the cash budget and the balance sheet.
10. Does RR face any risks if it tightens its credit policy?
11. Assume that RR purchases $300,000 (net of discounts) of materials on terms of 1/10, net 30, but that it can get away with paying on the 35th day if it chooses not to take discounts. How much free trade credit can the company get from its equipment supplier, how much costly trade credit can it get, and what is the percentage cost of the costly credit? Should RR take discounts?
Explanation / Answer
RR CASH BUDGET FOR JAN AND FEB:
9. Reducing inventory purchases will increase the company's cash holdings in the short run,thus reducing the amount of financing or the target cash balance needed. In the long run, the company is likely i sreduced its cash holdings in order to increase its EVA. RR can use the excess cash to make investments in more productive assets such as plant and equipments. alternatively, RR can distribute the excess cash to its shareholders through higher dividends or repurchasing its shares.
10. A tighter credit policy may discourage sales, some customers may choose to go elsewhere if they are pressued to pay their bills sooner.
11. If RR s net purchses $ 300,000 , then , with a 1% discount, its gross purchases are 300000/.99 = 303030. Daily purchases from the supplier are 300000/365 = 821.92.
If discount is taken , then RR must pay this supplier at the end of day 10 for purchases made on day 1, on day 11 for purchases made on day 2, so on. so, RR willl pn average have 10 days worth of purchases in payables, so,
payables = 10*821.92 = 8219
if discount is not taken then RR will wait for 35 days before paying so,
payables= 35*821.92=28767
Therefore:
Trade credit if discount not taken 28767
Trade credit if discount taken - 8219
Difference 20548= costly trade credit
To obtain 20548 of costly trade credit, RR must give up 0.01(303030) = 3030 in lost discounts annually, since the forgone discount pay for 20548, the nominal annual interest is
3030/20548= 14.74%
Nominal Cost of Trade Credit = (Discount%/1-Discount%) * (365 days/(days taken-discount period))
=1/99 * 365* (35-10) = .0101 * 14.6 = 0.1474 = 14.74%
If RR can obtain financing from its bank at an interest rate of less than 14.74%, it should borrow the funds and take discounts.
DEC JAN FEB Sales 68212 65213 52475 Collections: 1. during month of sale -- 12781.75 10285.10 2. during first month after sale -- 47748.40 45649.10 3. during second month after sale -- 7121.80 6821.20 4. Total collections 67651.95 62755.40 Purchases: 0.85 (forecast sales 2 mon from now) 44603.75 36472.65 25945.40 Payments: 1. payments for purchases 44603.75 36472.65 2. wages & salaries 6690.56 5470.90 3. Ren2t 2500 2500 4. Taxes Total payments 53749.31 44443.55 NET CASH FLOWS CASH AT BEG OF FORECAST 3000 NET CASH FLOW collection-payments 13857.64 18311.85 cumulative NCF 16857.64 35169.49 CASH SURPLUS (LOAN REQUIREMENT) Target cash balance 1500 1500 SURPLUS CASH OR LOAN NEEDED 15357.64 33669.49Related Questions
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