Cash flows It is typical for Jane to plan, monitor, and assess her financial pos

Question

Cash flows It is typical for Jane to plan, monitor, and assess her financial position using cash flows over a given period, typically a month. Jane has a savings account and her bank loans money at 6% per year while it offers short-term investment rates of5%, Jane's cash flows during August were as follows: contents into a spreadsheet.) Click on the icon located on the top-right corner of the data table in order to copy its a. Determine Jane's total cash inflows and cash outflows. b. Determine the net cash flow for the month of August. c. If there is a shortage, what are a few options open to Jane? d. If there is a surplus, what would be a prudent strategy for her to follow?

Explanation / Answer

a. Jane's total Cash inflow during August month= Interest received on Short-term investment @ 5% p.a. + Salary received = $450 + $4500= $4950

a. Jane'stotal Cash outflow during August month= monthly expenses pertaining to Clothes+ Dining out + Groceries + Auto payment + Utilities + Mortgage + Gas= $1100 + $520 + $760 + $342 + $280 + $1270 + $228 = $4500

b. Jane's net cashflow for August month= Total Cash inflow - Total Cash outflow = $4950 - $4500 = $450

c. In case of shortage i.e. deficit in monthly budget [which is not the case here], Jane has following one option:

i. As per the interest amount of $450 received for month, if we calculate the yearly interest, it works out to:

$450 per month * 12 months of a year= $5400 per year;

Next, this $5400 per year represents Jane's short-term investment @ 5% per year; Thus; if each $100 pays yearly interest amount of $5 [i.e. 1/20th of Principal amount of Investment; thus Investment Principal is 20 times the annual interest amount]; accordingly for $5400 annual interest, the Investment Principal= 20 times $5400= $108,000.

Thus Jane has an option of meeting the monthly deficit /shortage amount out of this Investment Principal Amount.

d. In case of Surplus in monthly budget [which is the case here], the prudent strategy for her to follow is: to add the surplus amount to her savings in the form of existing Short-term Investment Principal amount of $108,000, which in-turn will start yielding higher amount of interest in subsequent months, which in-turn will help her part-service her monthly Mortgage payments.

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