Suppose that you have generated the estimates listed below from a pro forma analysis for a manufacturing company that had requested a three- 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.

                                                        Year 1           Year 2                 Year 3

Capital expenditures               $ 250,000        $ 125,000        $ 75,000

Cash dividends                         $ 140,000        $ 140,000        $ 140,000

Cash flow from operations     $ 750,000        $ 780,000        $ 800,000

before interest expense

a. The prime rate averages 8 percent each year. Will the firm’s CFO 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?