Question

Checkpay, Inc - Starting Condensed Balance Sheet

	(in $000s)
Net working capital	$100
Fixed assets	100
Total Assets	$200
Bank loan	$100
Equity	100
Total Debt and Equity	$200

Checkpay, Inc. - Forecasted Condensed Income Statements

				(in $000s)
	Year 1	Year 2	Year 3	Year 4
Revenues	$100	$200	$300	$450
Expenses	170	230	300	360
Net income	$–70	$–30	$ 0	$ 90

Returning to Checkpay, Inc. in Problem 10, Johnny returns from the bank very disappointed. It seems that the bank’s analyst has questioned his financial plan. Upon questioning, Johnny had admitted that his plans for growth would require additional net working capital even though he proved that no additional fixed assets would be needed. Johnny forecasts that he will need to expand his net working capital by $20,000 per year to meet growth. Construct a forecast of the first 4 years of statements of cash flow and the first 4 years of balance sheets. Use these statements to show Johnny how much of a bank loan he will ultimately need because it is new bank loans that must be used to meet capital needs. (The bank loan is the slack variable that will allow these financial statements to balance.) Ignore additional interest expense.

Answer 1

The Forecast of the first 4 years of Balance sheets: (Amt. in $'000)

Assets: Year 1 Year 2 Year 3 Year 4

Net Working Capital 120 140 160 180   

Fixed Assets 100 100 100 100

Total 220 240 260 280

Liabilities :

Bank Loan 120 140 160 180

Equity 100 100 100 100

Total 220 240 260 280

The Forecast of the first 4 years of Statement of Cashflow: (Amt. in $'000)

Year 1 Year 2 Year 3 Year 4

Cash Inflow:

Revenue 100 200 300 450

Working capital 20 40 60 80

120 240 360 530

Cash Outflow:

Expense (170) (230) (300) (360)

Bank Loan (20) (40) (60) (80)

(190) (250) (360) (440)