[cpaswag]

few questions 1) is there simpler way to do this, and 2) can someone walk me through how amounts in cash outflow for interest, change in line of credit , and ending balance is calculated exactly for each one after the first one ?

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

Incorrect C.
$80,000

D.
$132,000

Answer was B
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.

[Anonymous]

THIS TOPIC IS A MUST-STUDY PART OF BEC_:)

Good luck!

[Author]

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