It is the beginning of January. Actual sales for the previous quarter (Q4) and e

Question

It is the beginning of January. Actual sales for the previous quarter (Q4) and estimated sales for the next five quarters are as follows (in $ million):

You collect 40% of sales in the current quarter and the remainder in the following quarter. You expect to spend 40% of the following quarter's sales on purchases of components from suppliers, and to pay 90% of those purchases in the current quarter and the remainder in the following quarter. Wages and other expenses add up to 30% of each quarter's sales.

You have to pay $4 million in interest and dividends each quarter, and plan to spend $7 million on new machinery in Q3.

Assume that each quarter has 90 days, sales occur evenly throughout the quarter and all other cash flows occur at the end of the quarter.

What is your expected net cash flow in Q1 (in $ million)?

What is your expected net cash flow in Q2 (in $ million)?

What is your expected net cash flow in Q3 (in $ million)?

What is your expected net cash flow in Q4 (in $ million)?

Explanation / Answer

Cash flow for a quarter = 60% * Previous quarter Sales + 40% * Current quarter Sales - 10% * 40% of Previous Qaurter - 90% * 40% of Current Quarter - 30% of Current Sales as wages and expenses - 4 miillion in interest and dividend

1. Expected Net cash flow for Q1 = 60% * 27 + 40% * 28.35 - 10%* 40% * 27 - 90% * 40% *28.35 - 30% * 28.35 -4 = 3.749

2. Expected Net cash flow for Q2 = 60% * 28.35 + 40% * 29.77 - 10%* 40% * 28.35 - 90% * 40% *29.77 - 30% * 29.77 -4 = 4.1358

3. Expected Net Cash flow For Q3(Including the capital expenditure) = 60% * 29.77 + 40% * 31.26 - 10%* 40% * 29.77 - 90% * 40% *31.26 - 30% * 31.26 -4 -7 = 1.92

4. Expected Net Cash flow For Q4 = 60% * 31.26 + 40% * 32.82 - 10%* 40% * 31.26 - 90% * 40% *32.82 - 30% * 32.82 -4 = 4.9724


Best of Luck. God Bless

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