Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a 3-year term loan. The loan is a $1.5 million term loan with equal annual principal payments. Principal and interest are payable at the end of each year with interest calculated against outstanding principal at a rate of prime plus 2 percent.

a. If prime averages 8 percent each year, will the firm’s cash flow from operations before interest be sufficient to meet debt service requirements and other mandatory expenditures?

b. If prime averages 8 percent, 9 percent, and 10 percent over the three years, respectively, will cash flow be sufficient?