# 1. If You Invest \$500 in a Bank Where You Will Earn 8% Compounded Annually, How Much Will

1. If you invest \$500 in a bank where you will earn 8% compounded annually, how much will it be worth after 7 years?

= \$500 × (1.08)7

= \$856.91

2. What would be the probable effect on a firm’s cash position of the following events? Prepare at least 100-word for each of the following 4 scenarios.

1) Rapidly Rising Sales;

If sales increase rapidly, then such an increase would be matched by an increase inventory and other assets if the firm does not have excess capacity to absorb the rapid increase in sales. If this is the case- the firm does not have excess capacity, the rapid increase in sales, and therefore the increased cash inflow from sales might result in a higher outflow of cash to pay for the increased inventory as well as other assets. Since increases in assets are financed either by debt or equity, then an increase in the cash inflow resulting from increased sales, might result in a higher cash outflow to pay for assets and liabilities that arise because of such sales increase.

2) A delay in the payment of Accounts Payable;

increased supply of available cash

3) A more liberal credit policy on sales (to the firm’s customers);

decreased cash inflow

4) Holding larger Inventories.

immediate decrease in cash inflows (or a cash outflow).

3. Prepare a cash budget for Carmel covering the first seven months of 2009 in Microsoft Excel Spreadsheet. The Carmel Corporation’s projected sales for the first eight months of 2009 are as follows: January \$100,000 February 110,000 March 130,000 April 250,000 May 275,000 June 250,000 July 235,000 August 160,000 The company’s cash balance at December 31, 2008, was \$22,000. Of Carmel’s sales in 2009, 20 percent is for cash, another 60 percent is collected in the month following sale, and 20 percent is collected in the second month following sale. November and December sales for 2003 were \$220,000 and \$175,000, respectively. Carmel purchases its raw materials two months in advance of its sales equal to 70 percent of their final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April sales are made in February and payment is made in March. In addition, Carmel pays \$10,000 per month for rent and \$20,000 each month for other expenditures. Tax prepayments for \$23,000 are made each quarter beginning in March.

CASH BUDGET

DATA

January 100,000 May275,000

February 110,000 June250,000

March 130,000 July235,000

April 250,000 August160,000

The Carmel Corporation Cash Budget Worksheet

NovDecJanFebMarAprMayJuneJulyAug

\$220,000\$175,000\$100,000\$110,000\$130,000\$250,000\$275,000\$250,000 \$235,000 160k

Collections:

Month of sale (20%)20,00022,00026,00050,00055,00050,00047,000

First month (60%)105,00060,00066,00078,000150,000165,000150,000

Second month (20%)44,00035,00020,00022,00026,00050,00055,000

###### Total Collections169,000117,000112,000150,000231,000265,000252,000

Purchases70,00077,00091,000175,000192,500 175,000164,500112,0000

###### Payments (1 mo lag)70,00077,00091,000175,000192,500175,000 164,500112,000

Cash Receipts

(collections)169,000117,000112,000150,000231,000265,000252,000

Cash Disbursements

Purchases77,00091,000175,000192,500175,000164,500112,000

Rent10,00010,00010,000 10,00010,00010,00010,000

Other Expenditures20,00020,00020,00020,00020,00020,00020,000

Tax Deposits23,00023,000

Interest on Short-Term5601,2911,044579

Borrowing

Total Disbursements\$107,000\$121,000\$228,000\$223,060\$206,291\$218,544\$142,579

Net Monthly Change\$62,000(\$4,000)(\$116,000)(\$73,060)\$24,709\$46,456\$109,421

Beginning Cash Balance22,00084,00080,00020,00020,00020,00020,000

Additional Financing56,00073,060(24,709)(46,456)(57,895)

Needed (Repayment)

###### Ending Cash Balance\$84,000\$80,000\$20,000\$20,000\$20,000\$ 20,000\$71,526

Cumulative Borrowing0056,000\$129,060\$104,351\$57,8950

(b)The firm will not have sufficient funds to cover the \$250,000 note payable due in July.