Chapter 4.17, Problem 7P

Explanation of Solution

Finding optimal solution:

Consider the cash flows in a small toy store, Toyco projects. In the below table, cash flow in each month is given.

Month	Cash flow
January	-12
February	-10
March	-8
April	-10
May	-4
June	5
July	-7
August	-2
September	15
October	12
November	-7
December	45

The money has to be borrowed to pay the bills. The Toyco has the following options,

Option a:

• Toyco takes a long term loan for one year at interest rate of 1%.
• The cash flow is negative from January to May. That is a total of $44 thousand required for these months.
• The cash flow is positive for the month of June. So, no money required in June.
• A $7 thousand will be required for the month of July. However, $5thousand is already in hand from previous month. So, loan amount is $2 thousand.
• For the month of August, loan amount is $2 thousand. So for the subsequent months, no loan will be required.
• Therefore, total one-time loan amount is $48 thousand.

Option b:

• Toyco takes short term loan at monthly interest rate of 1.5%. Loan is taken such that only that month’s requirements are met.

Follow the steps to find the solution,

Step 1:

Enter the required data in Excel worksheet. In excel worksheet, create columns of Month, Cash Flow, Loan Amount, and Balance Loan amount is initially set to 0. Enter the formula $\text{=B2+C2}$ in balance column