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The chief financial officer for Eagle's Beach Wear and Gift Shop is planning for the company's cash flows for the next six months.

The chief financial officer for Eagle's Beach Wear and Gift Shop is planning for the

company's cash flows for the next six months. The following table summarizes the

expected accounts receivables and planned payments for each of these months (in

$100,000s).

January February March April May June

Accounts Receivable 1.50 1.00 1.40 2.30 2.00 1.00

Balances Due

Planned Payments 1.80 1.60 2.20 1.20 0.80 1.20

(net of discounts)

The company currently has a beginning cash balance of $400,000 and desires to

maintain a balance of at least $25,000 in cash at the end of each month. To accomplish

this, the company has several ways of obtaining short-term funds:

1. Delay Payments. In any month, the company's suppliers permit it to delay any

or all payments for one month. However, for this consideration, the company

forfeits a 2% discount that normally applies when payments are made on time.

(Loss of this 2% discount is, in effect, a financing cost.)

2. Borrow Against Accounts Receivables. In any month, the company's bank will

loan it up to 75% of the accounts receivable balances due that month. These

loans must be repaid in the following month and incur an interest charge of

1.5%.

3. Short-Term Loan. At the beginning of January, the company's bank will also

give it a 6-month loan to be repaid in a lump sum at the end of June. Interest on

this loan is 1% per month and is payable at the end of each month.

Assume the company earns 0.5% interest each month on cash held at the beginning

of the month.

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