Question

Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $520,000 to $1,040,000 next year. Eli notes that net assets (Assets - Liabilities) will remain at 30 percent of sales. His firm will enjoy an 9 percent return on total sales. He will start the year with $120,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy. 9.1 points a. Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 30 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign.) Ending cash balance (46,400) eBook Hint Print b. Does his optimistic outlook for his cash position appear to be correct? References O No Yes

Answer 1

a) Final Cash balance = Initial Cash balance - Net Assets build Up + Profit = 120,000 - (1,040,000-520,000)*0.3 + 9%*1040000 = 57,600

b) No, It does not seem to be correct

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