Randall Manufacturing has requested a $2 million, four-year term loan from Farmers State Bank. It will use the money to expand its warehouse and to upgrade its assembly line. Randall supplied the following cash flow forecasts as part of the loan application.

The forecasts assume that the loan is granted in 2014 and that $2.590 million will be spent that year on the expansion and upgrade. Randall plans to spend $50,000 each year to replace worn-out manufacturing equipment and $100,000 each year for dividends.

Required:
1. As the bank€™s chief loan officer, what is your opinion about the degree of credit risk associated with this $2 million loan?
2. How can Randall Manufacturing lower its creditrisk?

(S in thousands) 2014 2015 2016 2017 Cash provided by operations Cash used for investing activities Cash 685 (2,590) 2.000 $ 95 $715 (50) (100) 565 $720 (50) (100) $570 $735 (50) (100) S585 used for financing activities Net change in cash