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CHAPTER 18 C-1
CHAPTER 18
KEAFER MANUFACTURING WORKING
CAPITAL MANAGEMENT
1. The sales each of the next five quarters are projected at:
Q1
Q2
Q3
Q4
Sales next year
$964,440.00
$997,920.00
$1,075,680.00
$926,640.00
Sales following year
$1,041,595.20
The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses,
dividends, interest, and capital outlays. The cash flows for each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous
quarter
$614,700.00
$610,812.00
$632,016.00
$681,264.00
Collections from current
quarter sales
353,628.00
365,904.00
394,416.00
339,768.00
Payments to suppliers for
previous quarter
–283,974.00
–293,832.00
–316,728.00
–272,844.00
Payments to suppliers for
current quarter
–205,128.00
–221,112.00
–190,476.00
–214,105.68
Expenses
–241,110.00
–249,480.00
–268,920.00
–231,660.00
Dividends and interest
–190,000.00
–190,000.00
–190,000.00
–190,000.00
Outlay
–325,000.00
Net cash flow
$48,116.00
$22,292.00
–$264,692.00
$112,422.32
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$170,000.00
$218,116.00
$240,408.00
–$24,284.00
Net cash inflow
48,116.00
22,292.00
–264,692.00
112,422.32
Ending cash balance
$218,116.00
$240,408.00
$24,284.00
$88,138.32
Minimum cash balance
130,000.00
130,000.00
130,000.00
130,000.00
Cumulative surplus/deficit
$88,116.00
$110,408.00
–$154,284.00
–$41,861.68
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance
$130,000.00
$130,000.00
$130,000.00
$130,000.00
Net cash inflow
48,116.00
22,292.00
–264,692.00
112,422.32
CHAPTER 18 C-2
New short-term investments
–48,316.00
–22,733.58
0
0
Income on short-term investments
200.00
441.58
555.25
0
Short-term investments sold
0
0
111,049.58
0
New short-term borrowing
0
0
153,087.17
0
Interest on short-term borrowing
0
0
0
–1,837.05
Short-term borrowing repaid
0
0
0
–110,585.27
Ending cash balance
$130,000.00
$130,000.00
$130,000.00
$130,000.00
Minimum cash balance
–130,000.00
–130,000.00
–130,000.00
–130,000.00
Cumulative surplus/deficit
$0
$0
$0
$0
Beginning short-term investments
$40,000.00
$88,316.00
$111,049.58
$0
Ending short-term investments
88,316.00
111,049.58
0
0
Beginning short-term debt
0
0
0
153,087.17
Ending short-term debt
$0
$0
$153,087.17
$42,501.90
The interest calculations for each quarter and the net cash cost are:
Q1:
Excess funds at start of quarter of
$40,000.00
earns
$200.00
in income.
Q2:
Excess funds at start of quarter of
$88,316.00
earns
$441.58
in income.
Q3:
Excess funds at start of quarter of
$111,049.58
earns
$555.25
in income.
Q4:
Shortage of funds at start of quarter of
$153,087.17
costs
$1,837.05
in interest.
Net cash cost
Q1
$200.00
Q2
441.58
Q3
555.25
Q4
–1,837.05
Cash generated by short-term financing
–$640.22
2. If Keafer reduces its target cash balance to $100,000, the cash flows each quarter will remain the same,
so they will not be repeated here. The cash balance and short-term financial plan will be:
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$170,000.00
$218,116.00
$240,408.00
–$24,284.00
Net cash inflow
48,116.00
22,292.00
–264,692.00
112,422.32
Ending cash balance
$218,116.00
$240,408.00
–$24,284.00
$88,138.32
Minimum cash balance
100,000.00
100,000.00
100,000.00
100,000.00
Cumulative surplus/deficit
$118,116.00
$140,408.00
–$124,284.00
–$11,861.68
Short-term Financial Plan
Target cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Net cash inflow
48,116.00
22,292.00
–264,692.00
112,422.32
New short-term investments
–48,466.00
–22,884.33
0
0
CHAPTER 18 C-3
Income on short-term investments
350.00
592.33
706.75
0
Short-term investments sold
0
0
141,350.33
0
New short-term borrowing
0
0
122,634.92
0
Interest on short-term borrowing
0
0
0
–1,471.62
Short-term borrowing repaid
0
0
0
–110,950.70
Ending cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Minimum cash balance
–100,000.00
–100,000.00
–100,000.00
–100,000.00
Cumulative surplus/deficit
$0
$0
$0
$0
Beginning short-term investments
$70,000.00
$118,466.00
$141,350.33
$0
Ending short-term investments
118,466.00
141,350.33
0
0
Beginning short-term debt
0
0
0
122,634.92
Ending short-term debt
$0
$0
$122,634.92
$11,684.22
Q1:
Excess funds at start of quarter of
$70,000.00
earns
$350.00
in income.
Q2:
Excess funds at start of quarter of
$118,466.00
earns
$592.33
in income.
Q3:
Excess funds at start of quarter of
$141,350.33
earns
$706.75
in income.
Q4:
Shortage of funds at start of quarter of
$122,634.92
costs
$1,471.62
in interest.
Net cash cost
Q1
$350.00
Q2
592.33
Q3
706.75
Q4
–1,471.62
Cash generated by short-term financing
$177.46
3. The sales each of the next five quarters at an 11 percent growth rate are projected at:
Q1
Q2
Q3
Q4
Sales next year
$991,230.00
$1,025,640.00
$1,105,560.00
$952,380.00
Sales following year
$1,100,265.30
The cash flows for each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous
quarter
$614,700.00
$627,779.00
$649,572.00
$700,188.00
Collections from current
quarter sales
363,451.00
376,068.00
405,372.00
349,206.00
Payments to suppliers for
previous quarter
–291,862.17
–301,994.00
–325,526.00
–280,423.00
Payments to suppliers for
current quarter
–210,826.00
–227,254.00
–195,767.00
–226,165.65
Expenses
–247,807.50
–256,410.00
–276,390.00
–238,095.00
Dividends and interest
–190,000.00
–190,000.00
–190,000.00
–190,000.00
Outlay
–325,000.00
Net cash flow
$37,655.33
$28,189.00
–$257,739.00
$114,710.36
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$170,000.00
$207,655.33
$235,844.33
–$21,894.67
Net cash inflow
37,655.33
28,189.00
–257,739.00
114,710.36
Ending cash balance
$207,655.33
$235,844.33
–$21,894.67
$92,815.69
Minimum cash balance
100,000.00
100,000.00
100,000.00
100,000.00
Cumulative surplus/deficit
$107,655.33
$135,844.33
–$121,894.67
–$7,184.31
The short-term financial plan looks like this:
Short-term Financial Plan
Target cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Net cash inflow
37,655.33
28,189.00
–257,739.00
114,710.36
New short-term investments
–38,005.33
–28,729.03
0
0
Income on short-term
investments
350.00
540.03
683.67
0
Short-term investments sold
0
0
136,734.36
0
New short-term borrowing
0
0
120,320.97
0
Interest on short-term
borrowing
0
0
0
–1,443.85
Short-term borrowing repaid
0
0
0
–113,266.50
Ending cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Minimum cash balance
–100,000.00
–100,000.00
–100,000.00
–100,000.00
Cumulative surplus/deficit
$0
$0
$0
$0
Beginning short-term
investments
$70,000.00
$108,005.33
$136,734.36
$0
Ending short-term investments
108,005.33
136,734.36
0
0
Beginning short-term debt
0
0
0
120,320.97
Ending short-term debt
$0
$0
$120,320.97
$7,054.46
Q1:
Excess funds at start of quarter of
$70,000.00
earns
$350.00
in income.
Q2:
Excess funds at start of quarter of
$108,005.33
earns
$540.03
in income.
Q3:
Excess funds at start of quarter of
$136,734.36
earns
$683.67
in income.
Q4:
Shortage of funds at start of quarter of
$120,320.97
costs
$1,443.85
in interest.
Net cash cost
Q1
$350.00
CHAPTER 18 C-5
Q2
540.03
Q3
683.67
Q4
–1,443.85
Cash generated by short-term financing
$129.85
The sales each of the next five quarters at a 5 percent growth rate are projected at:
Q1
Q2
Q3
Q4
Sales next year
$937,650.00
$970,200.00
$1,045,800.00
$900,900.00
Sales following year
$984,532.50
If the sales growth rate is 5 percent, the cash flows for each quarter will be:
CHAPTER 18 C-6
Short-term investments sold
0
0
145,966.30
0
New short-term borrowing
0
0
124,948.87
0
Interest on short-term borrowing
0
0
0
–1,499.39
Short-term borrowing repaid
0
0
0
–108,304.49
Ending cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Minimum cash balance
–100,000.00
–100,000.00
–100,000.00
–100,000.00
Cumulative surplus/deficit
$0
$0
$0
$0
Beginning short-term investments
$70,000.00
$128,926.67
$145,966.30
$0
Ending short-term investments
128,926.67
145,966.30
0
0
Beginning short-term debt
0
0
0
124,948.87
Ending short-term debt
$0
$0
$124,948.87
$16,644.38
The interest calculations for each quarter and the net cash cost are:
Q1:
Excess funds at start of quarter of
$70,000.00
earns
$350.00
in income.
Q2:
Excess funds at start of quarter of
$128,926.67
earns
$644.63
in income.
Q3:
Excess funds at start of quarter of
$145,966.30
earns
$729.83
in income.
Q4:
Shortage of funds at start of quarter of
$124,948.87
costs
$1,499.39
in interest.
Net cash cost
Q1
$350.00
Q2
644.63
Q3
729.83
Q4
–1,499.39
Cash generated by short-term financing
$225.08
4. Since the only period in which there is borrowing is the third period, we can set the ending short-term
debt in Quarter 3 equal to zero and use Solver. Doing so, we find the necessary target cash balance is
–$60,000, which implies it is not possible for the company to eliminate short-term borrowing during
the next year. The short-term financial plan would be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous
quarter
$614,700.00
$610,812.00
$632,016.00
$681,264.00
Collections from current
quarter sales
353,628.00
365,904.00
394,416.00
339,768.00
Payments to suppliers for
previous quarter
–283,974.00
–293,832.00
–316,728.00
–272,844.00
Payments to suppliers for
current quarter
–205,128.00
–221,112.00
–190,476.00
–214,105.68
Expenses
–241,110.00
–249,480.00
–268,920.00
–231,660.00
Dividends and interest
–190,000.00
–190,000.00
–190,000.00
–190,000.00
CHAPTER 18 C-7
Outlay
–325,000.00
Net cash flow
$48,116.00
$22,292.00
–$264,692.00
$112,422.32
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$170,000.00
$218,116.00
$240,408.00
$–24,284.00
Net cash inflow
48,116.00
22,292.00
–264,692.00
112,422.32
Ending cash balance
$218,116.00
$240,408.00
$–24,284.00
$88,138.32
Minimum cash balance
–60,000.00
–60,000.00
–60,000.00
–60,000.00
Cumulative surplus/deficit
$278,116.00
$300,408.00
$35,716.00
$148,138.32
The short-term financial plan looks like this:
CHAPTER 18 C-8
Q3
1,514.77
Q4
198.89
Cash generated by short-term financing
$4,259.99
5. If Keafer offers the discounted terms, we must assume the sales will remain unchanged. However, the
effect of the discount will be to reduce the dollars received from the sales by the discount percentage
for the customers who take advantage of the discount. This will change the cash flows Keafer receives.
The net sales after the discount each quarter will be:
Q2 net sales = $997,920(.25)(1 – .01) + $997,920(.75)
Q2 net sales = $945,869.40
Q3 net sales = $1,075,680(.25)(1 – .01) + $1,075,680(.75)
Q3 net sales = $1,014,816.60
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous
quarter
$614,700.00
$406,189.98
$420,290.64
$453,040.56
Collections from current
quarter sales
557,232.00
576,576.00
621,504.00
535,392.00
Payments to suppliers for
previous quarter
–283,974.00
–293,832.00
–316,728.00
–272,844.00
Payments to suppliers for
current quarter
–205,128.00
–221,112.00
–190,476.00
–214,105.68
Expenses
–240,507.23
–248,856.30
–268,247.70
–231,080.85
Dividends and interest
–190,000.00
–190,000.00
–190,000.00
–190,000.00
Outlay
–325,000.00
Net cash flow
$252,322.78
$28,965.68
–$248,657.06
$80,402.03
So, the cash balance each quarter will be:
CHAPTER 18 C-9
Cumulative surplus/deficit
$322,322.78
$351,288.46
$102,631.40
$183,033.43
The short-term financial plan under these assumptions will be:
Short-term Financial Plan
Target cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Net cash inflow
252,322.78
28,965.68
–248,657.06
80,402.03
New short-term investments
–252,672.78
–30,579.04
0
–80,933.84
Income on short-term investments
350.00
1,613.36
1,766.26
531.81
Short-term investments sold
0
0
246,890.80
0
New short-term borrowing
0
0
0
0
Interest on short-term borrowing
0
0
0
0
Short-term borrowing repaid
0
0
0
0
Ending cash balance
$100,000.00
$100,000.00
$100,000.00
$100,000.00
Minimum cash balance
–100,000.00
–100,000.00
–100,000.00
–100,000.00
Cumulative surplus/deficit
$0
$0
$0
$0
Beginning short-term investments
$70,000.00
$322,672.78
$353,251.82
$106,361.02
Ending short-term investments
322,672.78
353,251.82
106,361.02
187,294.85
Beginning short-term debt
0
0
0
0
Ending short-term debt
$0
$0
$0
$0
The interest earned each quarter is:
Q1:
Excess funds at start of quarter of
$70,000.00
earns
$350.00
in income.
Q2:
Excess funds at start of quarter of
$322,672.78
earns
$1,613.36
in income.
Q3:
Excess funds at start of quarter of
$353,251.82
earns
$1,766.26
in income.
Q4:
Excess funds at start of quarter of
$106,361.02
earns
$531.81
in income.
We will assume that Keafer takes the discount on all purchases, which means the payables period will
decline to 15 days. So, the cash flows each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous
quarter
$614,700.00
$406,189.98
$420,290.64
$453,040.56
Collections from current
quarter sales
557,232.00
576,576.00
621,504.00
535,392.00
Payments to suppliers for
previous quarter
–80,370.00
–83,160.00
–89,640.00
–77,220.00
Payments to suppliers for
current quarter
–415,800.00
–448,200.00
–386,100.00
–433,998.00
Expenses
–240,507.23
–248,856.30
–268,247.70
–231,080.85
Dividends and interest
–190,000.00
–190,000.00
–190,000.00
–190,000.00
Outlay
–325,000.00
Net cash flow
$245,254.78
$12,549.68
–$217,193.06
$56,133.71
Beginning short-term investments
$70,000.00
$315,604.78
$329,732.48
$114,188.08
Ending short-term investments
315,604.78
329,732.48
114,188.08
170,892.73
Beginning short-term debt
0
0
0
0
Ending short-term debt
$0
$0
$0
$0
The interest earned each quarter will be:
Q1:
Excess funds at start of quarter of
$70,000.00
earns
$350.00
in income.
Q2:
Excess funds at start of quarter of
$315,604.78
earns
$1,578.02
in income.
Q3:
Excess funds at start of quarter of
$329,732.48
earns
$1,648.66
in income.
Q4:
Shortage of funds at start of quarter of
$114,188.08
earns
$570.94
in interest.
Net cash cost
Q1
$350.00
Q2
1,578.02
Q3
1,648.66
Q4
570.94
Cash generated by short-term financing
$4,147.63
The effective annual rate the company’s suppliers are offering to Keafer is:
