Prepare a cash budget for the Bhulke Manufacturing Company indicating receipts and disbursements for May, June, and July. The firm wishes to maintain a minimum cash balance of Rs 20,000 at all…

Prepare a cash budget for the Bhulke Manufacturing Company indicating receipts and disbursements for May, June, and July. The firm wishes to maintain a minimum cash balance of Rs 20,000 at all times. Determine whether or not borrowing will be necessary during the period, and if it is, when and how much. As of April 30, the firm had a balance of Rs 20,000 in cash.

'Actual sales'Forecasted salesJanuaryRs 70,000MayFebruary60,000JuneMarch80,000JulyApril80,000AugustAccounts receivable: 50 percent of total sales are for cash. The remaining 50 percent will be collected equally during the following two months (the firm incurs a negligible bad-debt loss). Cost of goods manufactured: 70 percent of sales; 90 percent of this cost is paid during the first month after incurrence, the remaining 10 percent is paid the following month. Sales and administrative expenses: Rs 10,000 per month plus 10 percent of sales. All of these expenses are paid during the month of incurrence. Interest payments: Semiannual interest of Rs 18,000 is paid during July. An annual Rs 50,000 sinking fund payment is also made at that time. Dividends: A Rs 10,000 dividend payment will be declared and made in July. Capital expenditures: Rs 40,000 will be invested in plant and equipment in June. Taxes: Income tax payments of Rs 1,000 will be made in July.

Superlight Company estimates that due to the seasonal nature of its business, it will require an additional Rs 200,000 of cash for the month of July. Superlight has four options available to provide the needed funds. It can

• Establish a one-year line of credit for Rs 200,000 with a commercial bank. The commitment fee will be 0.5 percent, and the interest charge on the used funds will be 15 percent per annum. The minimum time the funds can be used is 30 days.
• Forego the July trade discount of 2/10, net 40 on Rs 200,000 of accounts payable.
• Issue Rs 200,000 of 30-day commercial paper at a 13.8 percent per annum interest rate.
• Issue Rs 200,000 of 60-day commercial paper at a 14 percent per annum interest rate. Since the funds are required for only 30 days, the excess funds (Rs 200,000) can be invested in 13 percent per annum marketable securities for the month of August. The total transaction fee on purchasing and selling the marketable securities is 0.5 percent of the fair value.

Required: a. Which financial arrangement results in the lowest cost? b. Is the source with the lowest expected cost necessarily the source to select? Why or why not?