4 - Cash Budget Kota Fibres produces nylon fiber at its...

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Cash Budget Kota Fibres produces nylon fiber at its only plant in Kota, India, and is preparing its cash budget for the month of September 2003 through December 2003. Expected sales from September 2003 to February 2004, as well as realized sales in July and August 2003 are depicted in Table 2 (in thousands of rupees (Rs)). For delivery and manufacturing reasons, Kota's purchases, which usually amount to 70% of sales, have to be made two months in advance and the material has to be paid in cash, i.e. Kota's actual supplier does not provide any credit at all. Collections of accounts receivables, on the other hand, are as follows: The cash from 40% of sales is collected after one month and the remaining 60% is collected after two months. Kota has a line of credit with Bank of India but no other type of debt. The interest it pays each month is computed as 1.25% × Line of Credit Balance at the End of the Previous Month. Other cash expenses are as follows: a Wages are 35% of the previous month purchases (there are no other salaries). That is, the production cycle is as follows: Raw material is purchased in a given month, processed by the employees in the following month and sold the month after (this could be improved, of course). a Rent is Rs10,000 per month. a A dividend of Rs20,000 will be paid to Kota's shareholders (mainly family members) at the end of September and at the end of December. a A tax payment of Rs25,000 will be made in November. a A fixed asset outlay of Rs150,000 is expected in October. 5 In order to keep its line of credit with Bank of India, Kota must clear it before the end of December. Failure to do so would result in the termination of the line of credit, which would severely
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hamper Kota's activities. Kota's minimum cash balance is Rs25,000 and its line of credit balance at the end of August is Rs45,000. Month Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Sales 210 220 440 500 380 320 220 200 Table 2: Sales expectations for Kota Fibres (in Rs000) (a) (10 points) Complete Kota's monthly cash budget from September 2003 to December 2003 using the above figures. Under the current assumptions, is Kota repaying its line of credit by the end of December? Answer: Kota's purchases in a given month are 70% of the sales expected two
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This note was uploaded on 05/21/2011 for the course ECON 123 taught by Professor Day during the Spring '11 term at Arab Open University, Amman.

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4 - Cash Budget Kota Fibres produces nylon fiber at its...

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