Miller Company is planning to construct a two-unit facility for the loading of beverage barrels onto ships. On or before January 1, Year 2, stockholders will invest $100,000 in the company's capital stock to provide the initial working capital. To finance the construction program (total planned cost is $1,800,000) the company will obtain a commitment from a lending organization for a loan of $1,800,000. This loan is to be secured by a 10-year mortgage note bearing interest at 5% per year on the unpaid balance. The principal amount of the loan is to be repaid in equal semiannual installments of $100,000 beginning June 30, Year 3. Since loan proceeds will only be required as construction work progresses, the company agrees to pay a commitment fee beginning January 1, Year 2, equal to 1 percent per year on the unused portion of the loan commitment. This fee is payable when amounts are "drawn down" except for the first draw-down.
Work on the construction of the facility will commence in the fall of Year 1. The first payment to the contractors is due on January 1, Year 2, at which time the commitment and loan agreement become effective and the company will make its first draw-down for payment to the contractors in the amount of $800,000. As construction progresses, additional payments will be made to the contractors by drawing down the remaining loan proceeds as follows (payments to contractors are made on the same dates as the loan proceeds are drawn down):

Because of weather conditions, the facility operates from April 1 through November 30 of each year. The construction program will permit the completion of the first of two plant units (capable of handling 5,000,000 barrels) in time for its use during the Year 2 shipping season. The second unit (capable of handling an additional 3,000,000 barrels) will be completed in time for the Year 3 season. It is expected 5,000,000 barrels will be handled by the facility during the Year 2 sea son. Thereafter, barrels handled are expected to increase in each subsequent year by 300,000 barrels until a level of 6,500,000 barrels is reached. The company's revenues are derived by charging the consignees of the beverage for its services at a fixed rate per barrel loaded. All revenues are collected in the month of shipment. Based upon past experience with similar facilities, Miller Company expects operating profit to average $0.04 per barrel before charges for interest, financing fees, and depreciation. Depreciation is $0.03 per barrel.

Prepare a cash forecast for each of the three calendar years: Year 2, Year 3, and Year 4. Evaluate the sufficiency of cash obtained from the issuance of capital stock, draw-downs on the loan, and the operating facility to cover cash payments to the contractor and the creditor (principal andinterest).

  • CreatedJanuary 22, 2015
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