Humber College Viability of The Expansion Questions

DescriptionManagerial Finance – Winter 2023
Name:
Assignment #4 (5% of your Final Grade)
Submission Requirements
• The entire assignment must be submitted in the Assignments section on Blackboard . Emailed assignments will
not be accepted.
• Late assignments will not be accepted.
Solutions must be in MS Word or PDF (tables especially, comments might be handwritten).
Scenario
Your family business is expanding. Based on your experience and in-depth knowledge of the market, you have
estimated the following results for the first 2 years (8 quarters) of the project.
• Expected revenues for the first two years are as follows.
o In addition, sales for the 1st quarter of Year 3 are projected at $370,000.
Q1
10
Year 1 (‘000s)
Q2
Q3
20
40
Q4
70
Q1
110
Year 2 (‘000s)
Q2
Q3
160
220
Q4
290
• General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales.
• Sales salaries and commissions are estimated to be 12% of sales.
• Accounts receivable at the beginning of this expansion are $0.
o Collection period = 30 days
• Accounts payable at the beginning of the expansion are $0.
o The Company quarterly purchases from suppliers = 40% of the next quarter’s forecasted sales.
o Suppliers are paid on average in 45 days.
• You will need to buy new equipment & furniture in both Year 1 – Q1 and Q3 for $25,000 ($50,000 total in Year 1).
• To help start the expansion you have secured an initial cash loan from the bank of $50,000. Interest on this loan is
$1,500 per quarter. The company will pay back the full $50,000 in the Year 2 – Q4.
• Interest on any additional short-term borrowing is expected to be 2% per quarter. The company required return must
be at least this much each quarter.
• The Company wishes to maintain a $50,000 minimum balance at all times to best manage its working capital and any
unexpected commitments.
Question #1 – (20 marks)
1. Based on the information above build a Cash Budget for the expansion. Use Appendix A
2. From above, does the company require any short-term financing? Explain. (50 – 100 words)
a. If so, use the template in Appendix B to build a Short-Term Financing Plan.
Question #2 – (10 marks) – 300-500 words
1. What are your thoughts on the viability of the expansion? Consider:
a. Both the above budgets
b. Some of the project evaluation tools from Chapters 9 & 10.
Managerial Finance – Winter 2023
Name:
Appendix A – Cash Budget
Q1
Cash Collections
Beginning A/R
Sales
Cash (A/R) Collections
Ending A/R
Cash Disbursements
Beginning A/P
Purchases
Paid A/P
Ending A/P
Total Cash Outflows
Paid A/P
General & admin. Expenses
Sales salaries & commissions
Capital expenditures
Loan Repayment
Loan Interest
Total cash disbursements
Net Cash Flows
Beginning cash balance
Total cash (A/R) collections
Total cash disbursements
Net cash inflow
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)
Year 1 (‘000s)
Q2
Q3
Q4
Q1
Year 2 (‘000s)
Q2
Q3
Q4
Managerial Finance – Winter 2023
Name:
Appendix B – Short-Term Financing Plan
Q1
Beginning cash balance
Net cash flow
Ending Cash Balance (before
borrowing or repayment)
Interest on exiting short-term
borrowing
New required short-term borrowing
Short-term borrowing repaid
Ending Cash Balance (after borrowing
or repayment)
Minimum cash balance
Cumulative surplus (deficit)
Beginning short-term debt
Change in short-term debt
Ending short-term debt
Year 1 (‘000s)
Q2
Q3
Q4
Q1
Year 2 (‘000s)
Q2
Q3
Q4

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