Questions and Problems 131 47. The CFO for Eagle Beach Wear and Gift Shop is in the process of planning for the com-pany's cash flows for the next six months. The following table summarizes the expected accounts receivables and planned payments for each of these months (in $100,000s). January February March April May June Accounts Receivable 1.50 1.00 1.40 2.30 2.00 1.00 Balances Due Planned Payments 1.80 1.60 2.20 1.20 0.80 1.20 (net of discounts) The company currently has a beginning cash balance of $40,000 and desires to main-tain a balance of at least $25,000 in cash at the end of each month. To accomplish this, the company has a number of ways of obtaining short-term funds: • Delay payments. In any month, the company's suppliers permit it to delay any or all payments for one month. However, for this consideration, the company forfeits a 2% discount that normally applies when payments are made on time. (Loss of this 2% discount is, in effect, a financing cost.) • Borrow against accounts receivables. In any month, the company's bank will loan it up to 75% of the accounts receivable balances due that month. These loans must be repaid in the following month and incur an interest charge of 1.5% • Take a short-term loan. At the beginning of January, the company's bank will also give it a six-month loan to be repaid in a lump sum at the end of June. Inter-est on this loan is 1 % per month and is payable at the end of each month. Assume the company earns 0.5% interest each month on cash held at the beginning of the month. Create a spreadsheet model the company can use to determine the least costly cash management plan (that is, minimal net financing costs) for this six-month pe-riod. What is the optimal solution? 48. WinterWearhouse operates a clothing store specializing in ski apparel. Given the seasonal nature of their business, there is often somewhat of an imbalance between when bills must be paid for inventory purchased and when the goods are actually sold and cash is received. Over the next six months, the company expects cash re-ceipts and requirements for bill paying as follows: Cash Receipts Bills Due $100,000 $400,000 2 $225,000 $500,000 Month 3 $275,000 $600,000 4 $350,000 $300,000 5 $475,000 $200,000 6 $625,000 $100,000 The company likes to maintain a cash balance of at least $20,000 and currently has $100,000 cash on hand. The company can borrow money from a local bank for the following term/rate structure: 1 month at 1 %, 2 months at 1.75%, 3 months at 2.49%, 4 months at 3.22%, and 5 months at 3.94%. When needed, money is borrowed at the end of a month and repaid, with interest, at the end of the month in which the obli-gation is due. For instance, if the company borrows $10,000 for 2 months in month 3, it would have to pay back $10,175 at the end of month 5. a. Create a spreadsheet model for this problem and solve it. b. What is the optimal solution? c. Suppose its bank wants to limit WinterWearhouse to borrowing no more than $100,000 at each level in the term/rate structure. How would this restriction change the solution to the
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