Eli Lilly is very excited because sales for his nursery and plant company are ex

Question

Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $510,000 to $1,020,000 next year. Eli notes that net assets (Assets - Liabilities) will remain at 55 percent of sales. His firm will enjoy an 8 percent return on total sales. He ill start the year with $110,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy a. Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 55 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign.) Ending cash balance b. Does his optimistic outlook for his cash position appear to be correct? O No Yes

Explanation / Answer

ENDING CASH BALANCE :

Opening cash balance

US$ 110000.00

(-) Asset built up (510000*55% = 280500)

-US$ 280500.00

(+) Profit (1020000*8% = 81600)

US$ 81600.00

-US$ 88900.00

No, the optimistic outlook for his cash position appear to be correct because the ending cash balance has become negative as cash has been invested in jaguar and luxury town house.

ENDING CASH BALANCE :

Opening cash balance

US$ 110000.00

(-) Asset built up (510000*55% = 280500)

-US$ 280500.00

(+) Profit (1020000*8% = 81600)

US$ 81600.00

-US$ 88900.00

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