# Problem Set #7 Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’s Renovations, a custom building and repair company, is prepa

Problem Set #7 Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’s Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2020 and 2021:

Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 20%; collections during the month following the sale, 60%; collections the second month following the sale, 25%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table. General and administrative salaries will amount to approximately \$25,000 a month; lease payments under long-term lease contracts will be \$7,000 a month; depreciation charges will be \$8,000 a month; miscellaneous expenses will be \$5,000 a month; income tax payments of \$30,000 will be due in both August and December; and a progress payment of \$95,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to \$70,000, and a minimum cash balance of \$30,000 will be maintained throughout the cash budget period.

a. Prepare a monthly cash budget for the last 6 months of 2020.

b. Prepare an estimate of the required financing (or excess funds)—that is, the amount of money Marvel’s Renovations will need to borrow (or will have available to invest)—for each month during that period.

c. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan amount. Perform a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.

Input Data

Collections during month of sale 20%
1461: Assumed constant: Do not change.

Collections during month after sale 60%
1461: This is a formula: do not change.

Collections during second month after sale 25%
1461: For problem e: Allow this to change to reflect slower collections.

Lease payments \$7,000

Target cash balance \$30,000

Depreciation charges \$8,000

Income tax payments (Sep & Dec) \$30,000

Miscellaneous expenses \$5,000

New office suite payment (Oct) \$95,000

Cash on hand July 1 \$70,000

Sales, labor, and RM adjustment factor 0%

a. Prepare a monthly cash budget for the last six months of the year.

May June July August September October November December January

Original sales estimates \$75,000 \$115,000 \$145,000 \$125,000 \$120,000 \$95,000 \$75,000 \$55,000 \$45,000

Original labor and raw mat. estimates \$80,000 \$75,000 \$105,000 \$85,000 \$65,000 \$70,000 \$30,000 \$35,000

Forecasted Sales

Sales (gross)

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.
Collections

During month of sale

During 1st month after sale

During 2nd month after sale

Total collections

Purchases

Labor and raw materials

Michael C. Ehrhardt: Original labor and RM estimates times 1 plus the sales adjustment factor.

1461: Assumed constant: Do not change.
Payments for labor and raw materials

1461: Payments this month are for last months Labor and raw materials.

1461: This is a formula: do not change.

1461: For problem e: Allow this to change to reflect slower collections.
Payments

Payments for labor and raw materials

Lease payments

Miscellaneous expenses

Income tax payments

Design studio payment

Total payments

Net Cash Flows

Cash on hand at start of forecast period

Net cash flow (NCF): Total collections – Total payments

Cumulative NCF: Prior month cumulative + this month’s NCF

Cash Surplus (or Loan Requirement)

Target cash balance

Surplus cash or loan needed: Cum NCF – Target cash

Max. Loan

b. Prepare an estimate of the required financing (or excess funds)—that is, the amount of money

Marvel’s Renovations will need to borrow (or will have available to invest)—for each month during that period.

e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the sales adjustment factor.

1461: Put the max loan for the base case hear.

1461: Use Excels MIN function for row 54 with a minus sign in front.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

1461: Original sales estimate times 1 plus the sales adjustment factor.

Note: When the percent collected during the second month after sale is changed, the percent for collections during month after sale is automatically changed so that 100% of sales are collected during the three-month period.