Question

112. Based on Robichek et al. (1965). The Korvair Department Store has $100,000 in available cash. At the beginning of each of the next six months, Korvair will receive revenues and pay bills as listed in the file P04_112.xlsx. It is clear that Korvair will have a short-term cash flow problem until the store receives revenues from the Christmas shopping season. To solve this problem, Korvair must borrow money. At the beginning of July, the company takes out a six-month loan. Any money borrowed for a six-month period must be paid back at the end of December along with 9% interest (early payback does not reduce the total interest of the loan). Korvair can also meet cash needs through month-to-month borrowing. Any money borrowed for a one-month period incurs an interest cost of 2.5% per month. Determine how Korvair can minimize the cost of paying its bills on time.

File P04_112.xlsx:

Please keep solution in the same format.

Answer 1

we will be taking a six month loan of 1100 , so that we can pay bills of first 2 months as revenue generated in these 2 months are low and in by taking 6 month loan we have pay this loan in end of december as compare to month to month borrowing as in intial month we are generating low revenue we willnot able to refund the laon payment

In sep  month we have taken loan of month to month as we were falling short of cash and oct also we borrowed one month loan to pay the loan of sep month .

interest total = one month loan (2.5+2.5625)=5.06

= six month loan = 99

total interest paid =99+5.06=104.06

below the given statement

hote: all cash amount Are in $1000s Available cash at the beginning Interest Rate on six month Loan Interest Rate on one month Loan 100 97 2.5% per month Jul Start of month Beginning Cash balance carried over Aug Sep 100 600 200 Oct 0 Nov Dec 200 595 1100 Six month loan One Month Loan 000 100 102.5 0 0 0 Cash on Hand after Taking out Loans 1200 600 300 102.5 200 595 0 0 Interest Due for the one month Loan One Month Loan repayment due One Month Loan and interest to be paid Cash Available after loan Payment 0 0 0 600 2.5 100 0 300 2.5625 102. 5 102.5 0 0 0 105.06 94.94 0 1200 0 595 Revenue From Sales Bills to Be Paid Ending Cash after Revenues annd Bills $100 $700 600 $200 $600 200 $300 $600 0 $600 $400 200 $700 $200 $595 $900 $100 $1,395 1100 End Of December Requirement Six month loan principal due Interest On six Month Loan Due Last one mOnth Loan due Interest On last one Month Loan Due Cash needed at the end of december 0 1199 ending cash for december 196 Total Interest Payments 10406