Linstead Auto Parts, a family-owned auto parts store, began January with $10,400 cash. Management forecasts that collections from credit customers will be $11,500 in January and $15,500 in February. The store is scheduled to receive $4,500 cash on a business note receivable in January. Projected cash payments include inventory purchases ($12,900 in January and $14,600 in February) and selling and administrative expenses ($2,500 each month).
Linstead Auto Parts’s bank requires a $10,000 minimum balance in the store’s checking account. At the end of any month when the account balance falls below $10,000, the bank automatically extends credit to the store in multiples of $1,000. Linstead Auto Parts borrows as little as possible and pays back loans in quarterly installments of $1,500, plus 3% APR interest on the entire unpaid principal. The first payment occurs three months after the loan.
Requirements
1. Prepare Linstead Auto Parts’s cash budget for January and February.
2. How much cash will Linstead Auto Parts borrow in February if collections from customers that month total $14,500 instead of $15,500?