5. Cash budget

The cash budget is considered the primary forecasting tool when firms try to estimate their cash flows and figure out if they are likely to need additional cash flows or to generate surplus cash.

Consider the case of Mooney Equipment:

Mooney Equipment is putting together its cash budget for the following year and has forecasted expected cash collections over the next five quarters (one year plus the first quarter of the next year). The cash collection estimates are based on sales projections and expected collection of receivables. The sales and cash collection estimates are shown in the following table (in millions of dollars):

	Q1	Q2	Q3	Q4	Q5
Sales	$1,650	$1,950	$2,000	$1,800	$2,050
Total cash collections	$1,650	$1,700	$1,750	$1,750

You also have the following information about Mooney Equipment:

	In any given period, Mooneys purchases from suppliers generally account for 70% of the expected sales in the next period, and wages, supplies, and taxes are expected to be 15% of next periods sales.
	In the third quarter, Mooney expects to expand one of its plants, which will require an additional $1,070 million investment.
	Every quarter, Mooney pays $45 million in interest and dividend payments to long-term debt and equity investors.
	Mooney prefers to keep a minimum target cash balance of at least $14 million at all times.

Using the preceding information, answer the following questions: (Note: Round your answers to the nearest millionth dollar.)

What is the net cash inflow that Mooney expects in the first quarter (Q1)?
If Mooney is beginning this year with a cash balance of $35 million and expects to maintain a minimum target cash balance of at least $14 million, what will be its likely cash balance at the end of the year (after Q4)?
What is the maximum investable funds that the firm expects to have in the next year?
What is the largest cash deficit that the firm expects to suffer in the next year?

True or False: One of the firms suppliers offers payment terms of 3/10, net 30, and the other offers net 30. If the firm chooses to go with the supplier that offers 3/10, net 30, and everything else remains the same, the firms net cash flow is likely to increase in a monthly cash budget after a few months.

True

False