[Anonymous]

I can’t figure out how the 1,020,000 was calculated in row 3 column e of this problem. What am I missing here? Thanks for your help.

Question:

The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows:

Cash (Millions)

---

Inflows Outflows

---

---

January $2 $1

February 2 4

March 2 5

April 2 3

May 4 2

June 5 3

Garth has a line of credit of up to $4 million, on which it pays interest monthly at a rate of 1% of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

A.

$0

B.

$61,000

C.

$80,000

D.

$132,000

Answer:

To calculate how much Garth will pay in interest during the first half of the year, the table provided must be used to develop an ongoing cash/credit balance:

Cash Change in

Opening Cash Cash Outflow for Line of Ending Cash

Cash Balance Inflows Outflows Interest Credit Balance

---

---

---

---

---

---

2,000,000 2,000,000 -1,000,000 – 3,000,000

3,000,000 2,000,000 -4,000,000 – 1,000,000

1,000,000 2,000,000 -5,000,000 2,000,000 0

0 2,000,000 -3,000,000 -20,000 1,020,000 0

0 4,000,000 -2,000,000 -30,200 -1,969,800 0

0 5,000,000 -3,000,000 -10,502 -1,050,200 939,298

Opening Balance Change in Ending Balance Interest

Line of Credit Line of Credit Line of Credit Payments

---

---

---

---

0 0 0 0

0 0 0 0

0 2,000,000 2,000,000 0

2,000,000 1,020,000 3,020,000 20,000

3,020,000 -1,969,800 1,050,200 30,200

1,050,200 -1,050,200 0 10,502

60,702

The total interest payments as shown above equal $60,702. This is approximately $61,000.

The trick with this problem is to remember that interest is an additional cash outflow in the month paid.