Question

Acme Rentals Inc. has the following projected cash flows for the next two months:

(000s)		February	March
Cash inflows		$980	$877
Cash outflows		930	983

a. The company has a target cash balance of $20,000 and will start February with $15,000. What is the company’s forecasted cumulative surplus or borrowing requirements for February and March? Calculations needed. (2 points)

b. Acme has a $45,000 line of credit available to borrow if they are short of funds. Is Acme’s line of credit sufficient to cover any projected cash shortfalls for February and March? No calculations needed. (1 point)

Answer 1

a. The company's surplus or borrowing requirements can be calculated by the following formula:

Opening Cash Balance + Cash Inflow - Cash Outflow - Target closing balance = Surplus / (Borrowing)

The detail calculation for February and March have been shown below:

Particulars	February	March
Opening Balance (A)	15,000	20,000
Cash Inflow (B)	980,000	877,000
Cash Outflow (C)	(930,000)	(983,000)
Target closing balance (D)	20,000	20,000
(Borrowing) / Surplus [A+B+C-D]	$ 45,000	$ (106,000)

As shown in table above, Acme will have surplus of $ 45,000 in February and will have to borrow $ 106,000 in March for forecasted cash requirements.

b. Given that Acme has a $45,000 line of credit available to borrow if they are short of funds. In part a of the answer, we note that the company will have surplus of $ 45,000 in February, hence no need for line of credit. Acme will have to borrow $ 106,000 in March for forecasted cash requirements. Therefore, $ 45,000 line of credit will not be sufficient to cover projected cash shortfalls in March.