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# Cash Balance/Calculations

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Question 1 - Mr. Eli Lilly is very excited because sales for his nursery and Plant Company are expected to double from \$600,000 to \$1,200,000 next year. Eli notes that net assets (assets - liabilities) will remain at 50 percent of sales. His firm will enjoy an 8 percent return on total sales. He will start the year with \$120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. Does his optimistic outlook for his cash position appear to be correct? Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit.

Question 3 - Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is \$150,000. The company can borrow \$150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.

How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan?

Question 4. Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

a. If the company has \$4 million per day in collections and \$2 million per day in disbursements, how many dollars will the cash management system free up?
b. If the company can earn 9 percent per annum on freed up funds, how much will the income be?
c. If the total cost of the new system is \$700,000, should it be implemented?

Question 5. Capone Child Care Centers, Inc., plans to borrow \$250,000 for one year at 10 percent from the Chicago Bank and Trust Company. There is a 20 percent compensating balance requirement. Capone keeps minimum transaction balances of \$18,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement. What is the effective rate of interest?

#### Solution Preview

Question 1 -
Additional Assets required to support increase in sales = 50% of sales = 50%*(1200000-600000)=300000
Profits for the years = 8%*1200000=96000
Cash at the beginning of the year = 120000
Cash deficit at the end of the year = 300000-96000-120000=84000
To double the sales Eli Lilly want additional cash of \$84,000

Question 3 -
Cost of computer = \$150,000
Interest paid in three years at the rate of 10% per annum = 150000*10%*3=\$45000
If one year loan is taken @8% and rolled over, the total interest paid is ...

#### Solution Summary

Cash balance calculations are given. The cash balance or deficit at the end of the year is given.

\$2.19