EC$,$ Inc., is seeking a term loan for new equipment. Management has given you a set of projections, and your calculations show that cash available to repay the loan is $$150,000$ annually, which compares to loan reductions of $$75,000$ annually, including interest.

EC Inc. $($in $$000$s$)31$ Dec $20$Y$431$ Dec $20$Y$5$

Sales $15,50016,275$

Cost of goods sold $12,21412,825$

Gross Profit $3,2863,450$

Operating Expenses $1,4741,548$

Operating Profit $1,8121,902$

Accounts Receivable

$2,3502,470$

Inventory $1,6002,410$

Accounts Payable $1,3751,440$

However, looking at these numbers, you notice that operating expenses in $20$Y$4$ were $9\mathrm{.}5\%$ of sales, which is the level shown in projections. But in $20$Y$1,20$Y$2,$ and $20$Y$3,$ operating expenses were $10\%$ of sales, and it appears $20$Y$4$ was an exceptional year if operating expenses return to $10\%$ next year and beyond, will this affect EC's loan request?

A$)$ Cash flow would be insufficient to repay the loan, which should be declined

B$)$ An $0\mathrm{.}5\%$ variation would make insignificant change to serviceability and so analysis should continue.

C$)$ Projected profits would reduce slightly, to $$1,823,000,$ but would still comfortably meet the proposed loan repayment of $$75,000.$