Capital Budgeting Precision Machines Student Note Fil 680969

Capital Budgetingprecision Machinesstudent Note Fill In the Light Yel

Capital Budgeting Precision Machines Student Note: Fill in the light yellow cells Data: November December January February March April May June Annual Cost of borrowing 10.00% Minimum Cash Balance $5,000.00 Beginning Cash Balance $7,500.00 Revenues (Sales) $40,000.00 $50,000.00 $48,000.00 $55,000.00 $35,000.00 $50,000.00 $65,000.00 $40,000.00 Cash Collections November December January February March April May June First Month (30%) $12,000.00 $15,000.00 $14,400.00 $16,500.00 $10,500.00 $15,000.00 $19,500.00 $12,000.00 Second Month (35%) $14,000.00 $15,500.00 $12,800.00 $14,250.00 $12,250.00 $12,500.00 $15,750.00 Third Month (35%) $14,000.00 $15,500.00 $14,400.00 $14,250.00 $12,250.00 $12,500.00 $15,750.00 Total Collections $45,900.00 $46,500.00 $41,600.00 $44,250.00 $35,000.00 $40,000.00 Cash Disbursements Material Purchases Salaries 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 Wages 3,000.00 3,500.00 3,000.00 3,200.00 3,500.00 3,000.00 Other Expenses Capital Expenditure 45,000.00 Dividends 1,000,000.00 Interest Total Disbursements Cash flows Net cash flows Cumulative cash flows Minimum Cash Balance Cash Surplus or (Deficit) Recommendations:

Paper For Above instruction

The primary objective of this paper is to analyze the cash flow implications for Precision Machines over a six-month period, considering their projected revenues, disbursements, and capital expenditure requirements. Capital budgeting involves assessing the inflows and outflows to determine the company’s liquidity position and ensure that operational and strategic investments do not compromise its financial stability. This analysis uses the provided data to project monthly cash flows, identify potential cash shortages or surpluses, and recommend necessary financing or cost-control measures.

Initially, understanding the starting cash balance and minimum cash requirement is essential. The starting cash balance of $7,500 exceeds the minimum balance of $5,000, providing a buffer for unforeseen expenses or revenue shortfalls. The revenues are forecasted monthly, with collections distributed across three months based on specified percentages. This staggered collection method impacts the cash inflows and needs careful synchronization with disbursements.

Disbursements primarily consist of material purchases, wages, and other expenses, including significant capital expenditure planned at $45,000. It is crucial to analyze whether existing cash reserves and incoming collections can cover these outflows while maintaining the minimum cash balance. Payments such as dividends and interest are also factored into total disbursements, complicating liquidity management.

The cash flow projections indicate that preliminary months may either result in surplus cash—if collections exceed disbursements—or deficits if disbursements outpace inflows, especially with high capital expenditures. For example, in the month of November, cash collections are $45,900, which, after deducting salaries, wages, and capital expenditure, might test the liquidity buffer. Continuous monitoring of cumulative cash flows will reveal periods where the company might need short-term borrowing to sustain operations or accelerate collections.

Based on the projections, strategies such as adjusting dividend payments, delaying non-essential expenses, or arranging short-term credit facilities could be recommended to ensure that the minimum cash buffer is maintained throughout the period. The decision to undertake the capital expenditure should also be evaluated against available cash and the potential for financing options, considering the 10% annual borrowing rate.

Concluding, a detailed cash flow analysis reveals the importance of diligent liquidity management in capital budgeting. Proper planning ensures operational continuity, supports strategic investments including capital projects, and protects the company against liquidity shocks. Regular monitoring, coupled with contingency planning, is vital for sound financial management in manufacturing firms like Precision Machines.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
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