Introduction: Mr. Long has proposed a payment plan different from the one we had proposed. Instead of paying off the $200,000 over the first four months in equal instalments, according to our proposal, he is proposing to pay $23,000 each month for the first 8 months and the balance $16,000 when the project is completed.
Analysis: Assuming that we are able to complete the project in 8 months, we will get $23,000 each month for the first 7 months and $39,000 in the eighth month. Our ability to keep larger balances in the bank will be much lower according to Mr. Long's proposal as compared to our own. Accordingly, we will earn just about $404 in interest if we agree to Mr. Long's proposal, as compared to $2,604 as per our own. More importantly, we run the risk of Mr. Long cancelling the contract mid-way leaving us with an unfinished project which we may find harder to sell.
Recommendation: Our recommendation is to persuade Mr. Long to agree to our proposal or something way better than his own, to make it financially more attractive and less risky for us.
End of Month | Cost | Inflow (firm's proposal) | Deposited in Bank | Interest earned | Net earnings | Inflow (customer's proposal) | Deposited in Bank | Interest earned | Net earnings |
1 | 20,000 | 50,000 | 30,000 | 30,000 | 23,000 | 3,000 | 3,000 | ||
2 | 20,000 | 50,000 | 30,000 | 143 | 30,143 | 23,000 | 3,000 | 14 | 3,014 |
3 | 20,000 | 50,000 | 30,000 | 286 | 30,286 | 23,000 | 3,000 | 29 | 3,029 |
4 | 20,000 | 50,000 | 30,000 | 430 | 30,430 | 23,000 | 3,000 | 43 | 3,043 |
5 | 20,000 | -20,000 | 575 | -19,425 | 23,000 | 3,000 | 58 | 3,058 | |
6 | 20,000 | -20,000 | 483 | -19,517 | 23,000 | 3,000 | 72 | 3,072 | |
7 | 20,000 | -20,000 | 390 | -19,610 | 23,000 | 3,000 | 87 | 3,087 | |
8 | 20,000 | -20,000 | 297 | -19,703 | 39,000 | 19,000 | 101 | 19,101 | |
Total | 1,60,000 | 2,00,000 | 40,000 | 2,604 | 42,604 | 2,00,000 | 40,000 | 404 | 40,404 |
A small construction firm, A&B Construction, is working on a house project for Mr. Long. The...
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Here are some questions I don't know how to answer, please
help
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cash budget, income statement and balance sheet
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