Question

Please assist. Thank you!

2/Ellingham plc opens a Spanish subsidiary, which starts operating on 2 January 2014. On 2 January 2014 it has to buy a machine costing €30m, partly financed by a €20m bank loan repayable in instalments of €2m every 15 July and 15 January over 5 years. Financial expenses, payable on a half-yearly basis, are as follows: - 2014 2015 2016 2017 2018 June 1 Dec 0.9 June 0.8 Dec 0.7 June 0.6 Dec 0.5 June 0.4 Dec 0.3 June 0.2 Dec 0.1 Profits are tax free. Sales will be €12 m per month. A month's inventory of finished products will have to be built up. Customers pay at 90 days. The company is keen to have a month's worth of advance purchases and, accordingly, plans to buy two months' worth of supplies in January 2011. Requirements in a normal month amount to €4m. The supplier grants the company a 90-day payment period. Other costs are: O personnel costs of €4m per month; O shipping, packaging and other costs amounting to €2m per month and paid at 30 days. These costs are incurred from 1 January 2014. Draw up a monthly and an annual cash flow plan. How much cash will the subsidiary need at the end of each month over the first year? And if operations are identical, how much will it need each month over 2015? What is the change in the cash position over 2015 (no additional investments are planned)?

Answer 1

Ans :

Monthly and Annual Cash Flow Plan for 2014

Figures are in Euro Millions

Particulars	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec	Annual
Machinery Purchase	30												30
Loan for Machinery purchase	-20												-20
Loan Re-payment							2						2
Finance Expenses						1						0.9	1.9
Debtors				-12	-12	-12	-12	-12	-12	-12	-12	-12	-108
Creditors				8	4	4	4	4	4	4	4	4	40
Personal Costs	4	4	4	4	4	4	4	4	4	4	4	4	48
Shipping, packaging and other costs		2	2	2	2	2	2	2	2	2	2	2	22
Net Monthly Cash Requirement	14	6	6	2	-2	-1	0	-2	-2	-2	-2	-1.1	15.9
Cumulative Requirement	14	20	26	28	26	25	25	23	21	19	17	15.9

The Subsidiary will require net cumulative balance requirement in each month over 2014.

Monthly and Annual Cash Flow Plan for 2015:

Particulars	Jan	Feb	Mar	Apr	May	June	July	Aug	Sep	Oct	Nov	Dec	Annual
Machinery Purchase
Loan for Machinery purchase													0
Loan Re-payment	2						2						4
Finance Expenses						0.8						0.7	1.5
Debtors	-12	-12	-12	-12	-12	-12	-12	-12	-12	-12	-12	-12	-144
Creditors	4	4	4	4	4	4	4	4	4	4	4	4	48
Personal Costs	4	4	4	4	4	4	4	4	4	4	4	4	48
Shipping, packaging and other costs	2	2	2	2	2	2	2	2	2	2	2	2	24
Net Monthly Cash Requirement	0	-2	-2	-2	-2	-1.2	0	-2	-2	-2	-2	-1.3	-18.5
Cumulative Cash requirement including b/f of 2014	15.9	13.9	11.9	9.9	7.9	6.7	6.7	4.7	2.7	0.7	-1.3	-2.6
No additional funds will be required in 2015 as the subsidiary is able to meet their routine monthly cash flow requirements from internal accruals.

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