HOMEWORK 4 OVERVIEW This is to be an INDIVIDUAL homework exercise where you

get an opportunity to build an integrated cash flow model (i.e. working projections)
that has the ability to determine a companys cash needs or excesses (as the case
may be) in a manner that keeps the companys balance sheet in balance at all
times. Instructions/background info presented below.
Historical financial spread
From the Radio Shack 2005 10K (dated 3/15/06, and included in your course
materials) the following financials have already been spread for you (I know, Im a
great guy) on Model worksheet: - 2003, 2004, 2005 income statement - 2004, 2005
balance sheet - 2003, 2004, 2005 cash flow statement
Historical ratios/metrics
On Assumptions worksheet, all historical ratios have already been calculated for
you (at this rate, Im a no-brainer for Professor of the Year) in columns D-F for the
income statement, balance sheet, cash flow statement, and interest metrics.

Let's look at an example to illustrate how to use IRR.

Assume Company XYZ must decide whether to purchase a piece of factory equipment for
$300,000. The equipment would only last three years, but it is expected to generate $150,000 of
additional annual profit during those years. Company XYZ also thinks it can sell the equipment
for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the
equipment purchase is a better use of its cash than its other investment options, which should
return about 10%.
Here is how the IRR equation looks in this scenario:
0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431)2 + ($150,000)/(1+.2431)3 +
$10,000/(1+.2431)4
The investment's IRR is 24.31%, which is the rate that makes the present value of the
investment's cash flows equal to zero. From a purely financial standpoint, Company XYZ should
purchase the equipment since this generates a 24.31% return for the Company --much higher
than the 10% return available from other investments.

NPV = {$2,000/(1+.045)^1} + {$7,000/(1+.045)^2} + {$11,000/(1+.045)^3} - $10,000

= $1,913.88 + $6,410.11 + $9,639.26 - $10,000

= $7,963.25
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KEAFER MANUFACTURING WORKING CAPITAL MANAGEMENT

You have recently been hired by Keafer Manufacturing to work in its established
treasury department. Keafer Manufacturing is a small company that produces highly
customized card boxes in a variety of sizes for different purchasers. Adam Keafer,
the owner of the company, works primarily in the sales and production areas of the
company. Currently, the company basically puts all receivables in one pile and all
payables in another, and a part-time bookkeeper periodically comes in and attacks
the piles. Because of this disorganized system, the finance area needs work, and
thats what you have been brought in to do.
The company currently has a cash balance of $210,000, and it plans to purchase
new machinery in the third quarter at a cost of $390.000. The purchase of the
machinery will be made with cash because of the discount offered for a cash
purchase. Adam wants to maintain a minimum cash balance of $135,000 to guard
against unforeseen contingencies. All of Keafers sales to customers and purchases
from supplier are made with credit, and no discounts are offered or taken.
The company had the following sales each quarter of the year just ended.

Q1
Gross Sales
$1.102,000
$1,063,000

Q2

Q3

$1.141,000

$1,125,000

Q4

After some research and discussions with customers, you are projecting that sales
will be 8 percent higher in each quarter next year. Sales for the first quarter of the
following year are also expected to grow at 8 %. You calculate that Keafer currently
has an accounts receivable period of 57 days and an accounts receivable balance of
$675,000. However, 10 percent of the accounts receivable balance is from a
company that has just entered bankruptcy, and it is likely that this portion will never
be collected.

Youve also calculated that Keafer typically orders supplies each quarter in the
amount of 50% of the next quarters projected gross sales, and suppliers are paid in
53 days on average. Wages , taxes, and other costs runs about 25% of gross sales.
The company has a quarterly interest payment of $185000 on its long-term debt.
Finally the company uses a local bank for its short-term financial needs. It currently
pays 1.2 percen per quarter on all short-term borrowing and maintains a money
market account that pays .5 percent per quarter on all short-term deposits.

Adam has asked you to prepare a cash budget and short-term financial plan for the
company under the current policies. He also asked you to prepare additional plans
based on changes in several inputs.

1. Use the numbers given to complete the cash budget and short-term financial
plan.
2. Rework the cash budget and short-term financial plan assuming Keafer
changes to a minimum cash balance of $90,000.
3. Rework the sales budget assuming an 11 % growth rate in sales and a 5 %
growth rate in sales. Assume a $135,000 target cash balance.
4. Assuming the company maintains its target cash balance at $135,000, what
sales growth rate would result in a zero need for short-term financing? To
answer this question, you may need o set up a spreadsheet and use the
Solver function.