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In: Finance
P4-15 (similar to) Multiple cash budgetslong dash—Scenario analysis Brownstein, Inc., expects sales of $101,000 during each...
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P4-15 (similar to) |
Multiple cash
budgetslong dash—Scenario
analysis Brownstein, Inc., expects sales of $101,000 during each of the next 3 months. It will make monthly purchases of $56,000 during this time. Wages and salaries are $ 10,000 per month plus 6 %of sales. Brownstein expects to make a tax payment of $25,000 in the next month and a $19,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero.
a. Construct a cash budget for the next 3 months.
b. Brownstein is unsure of the sales levels, but all other figures are certain. If the most pessimistic sales figure is $81,000
per month and the most optimistic is $121,000 per month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the 1-month periods?
c. Briefly discuss how the financial manager can use the data in parts a. and b. to plan for financing needs.
Solutions
Expert Solution
(a):
| Month 1 | Month 2 | Month 3 | |
| Opening cash balance | - | 3,940.00 | 13,880.00 |
| Sales | 101,000.00 | 101,000.00 | 101,000.00 |
| Cash from sale of asset | 8,000.00 | ||
| Total inflow | 101,000.00 | 101,000.00 | 109,000.00 |
| Cash payments/disbursements: | |||
| Purchases | 56,000.00 | 56,000.00 | 56,000.00 |
| Wages and Salaries: Fixed | 10,000.00 | 10,000.00 | 10,000.00 |
| Wages and Salaries: Variable (6% of sales) | 6,060.00 | 6,060.00 | 6,060.00 |
| Tax payment | 25,000.00 | ||
| Purchase of fixed assets | 19,000.00 | ||
| Total outflow | 97,060.00 | 91,060.00 | 72,060.00 |
| Closing cash balance | 3,940.00 | 13,880.00 | 50,820.00 |
(b): Pessimistic scenario:
| Month 1 | Month 2 | Month 3 | |
| Opening cash balance | - | - 14,860.00 | - 23,720.00 |
| Sales | 81,000.00 | 81,000.00 | 81,000.00 |
| Cash from sale of asset | 8,000.00 | ||
| Total inflow | 81,000.00 | 81,000.00 | 89,000.00 |
| Cash payments/disbursements: | |||
| Purchases | 56,000.00 | 56,000.00 | 56,000.00 |
| Wages and Salaries: Fixed | 10,000.00 | 10,000.00 | 10,000.00 |
| Wages and Salaries: Variable (6% of sales) | 4,860.00 | 4,860.00 | 4,860.00 |
| Tax payment | 25,000.00 | ||
| Purchase of fixed assets | 19,000.00 | ||
| Total outflow | 95,860.00 | 89,860.00 | 70,860.00 |
| Closing cash balance | - 14,860.00 | - 23,720.00 | - 5,580.00 |
Optimistic scenario:
| Month 1 | Month 2 | Month 3 | |
| Opening cash balance | - | 22,740.00 | 51,480.00 |
| Sales | 121,000.00 | 121,000.00 | 121,000.00 |
| Cash from sale of asset | 8,000.00 | ||
| Total inflow | 121,000.00 | 121,000.00 | 129,000.00 |
| Cash payments/disbursements: | |||
| Purchases | 56,000.00 | 56,000.00 | 56,000.00 |
| Wages and Salaries: Fixed | 10,000.00 | 10,000.00 | 10,000.00 |
| Wages and Salaries: Variable (6% of sales) | 7,260.00 | 7,260.00 | 7,260.00 |
| Tax payment | 25,000.00 | ||
| Purchase of fixed assets | 19,000.00 | ||
| Total outflow | 98,260.00 | 92,260.00 | 73,260.00 |
| Closing cash balance | 22,740.00 | 51,480.00 | 107,220.00 |
| Month 1 | Month 2 | Month 3 | |
| Monthly mimimum ending cash balance | - 14,860.00 | - 23,720.00 | - 5,580.00 |
| Monthly maximum ending cash balance | 22,740.00 | 51,480.00 | 107,220.00 |
(c): The financial manager can plan for financing needs by considering an average estimate of the optimistic and pessimistic sales scenarios. This will give the financial manager the most likely sales position and the most likely ending cash balance for each period. Using this number the manager can also determine the desired the minimum cash balance required at the end of each month and borrow any deficiency for meeting the same.
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