Question $4$

GameOn $("$GO$")$ is a startup involved in developing mobile games. They have recently raised $\backslash (\backslash$$ $4\backslash )$ million in Series B funding. They hire many young programmers that frequently work over time. Before the Series B funding kicks in January $20$x$3,$ the company is seeking a $\backslash (\backslash$$ $500,000\backslash )90-$day loan from its bank to help meet cash requirements in the upcoming fourth quarter of the year. As GO is a relatively new firm, the bank has requested for a cash budget for the quarter ending $31$ December $20$x$2.$ The firm's finance manager provided the following data:

$($i$)$ On October $1,$ the firm has a cash balance of $\backslash (\backslash$$ $295,000\backslash ).$

$($ii$)$ Actual and budgeted revenue from July to December $20$x$2$ are as follows:

Based on past experience, $\backslash (45\backslash \%\backslash )$ of a month's sales are collected in the month of sales, while $\backslash (60\backslash \%\backslash )$ and $\backslash (35\backslash \%\backslash )$ respectively of the remaining amount are collected in first and second months that follow. Thereafter, any amount remaining is deemed uncollectible.

$($iii$)$ Budgeted expenses for the fourth quarter are as follows:

All expenses are paid in full at the end of each month.

$($iv$)$ Rental $(\backslash (\backslash$$ $50,000\backslash )$ per month$)$ and insurance $(\backslash (\backslash$$ $30,000\backslash )$ per month$)$ is usually prepaid in the beginning of October for a quarter.

$($v$)$ Depreciation expenses relate to computer equipment. These are due for replacement in $\backslash (4^\{\backslash$text $\{$th $\}\}\backslash )$ quarter this year $($ending $31$ Dec $).$ But management has not decided as it will cost the firm $\backslash (\backslash$$ $250,000\backslash )$ to replace all its computer equipment.

$($vi$)$ Assume that the loan will be made at beginning of October and repaid at the end of December. Interest is calculated at $3\backslash \%$ p$.$a$.$ of the total loan amount and paid at the end of December.

Question $4$a

Prepare a schedule of expected cash collections for October, November and December and for the quarter in total.

$(14$ marks$)$

Question $4$b

Prepare a cash budget for the fourth quarter ended $31$ December $($show monthly columns and a total for the quarter$).$

$(13$ marks$)$

Question $4$c

If the company needs a minimum cash balance of $\backslash (\backslash$$ $50,000\backslash )$ at the start of the upcoming year, recommend whether $(1)$ the loan can be repaid at the end of the year and $(2)$ computer equipment can be replaced in $\backslash (4^\{\backslash$text $\{$th $\}\}\backslash )$ quarter. Based on your answer to $($b$),$ would

you recommend the company to borrow a different amount $($bank loan are in multiples of $\backslash (\backslash$$ $100,000)\backslash )?$ If so$,$ what would be the optimal amount necessary for the company?