2B5G MANDEL INC. HAS A ZERO-BALANCE ACCOUNT WITH A COMMERCIAL BANK....

143.

CSO: 2B5b

LOS: 2B5g

Mandel Inc. has a zero-balance account with a commercial bank. The bank sweeps any

excess cash into a commercial investment account earning interest at the rate of 4% per

year, payable monthly. When Mandel has a cash deficit, a line of credit is used which

has an interest rate of 8% per year, payable monthly based on the amount used. Mandel

expects to have a $2 million cash balance on January 1 of next year. Net cash flows for

the first half of the year, excluding the effects of interest received or paid, are forecasted

(in millions of dollars) as follows.

Jan

Feb

Mar

Apr

May

Jun

Net cash inflows ($) +2

+1

-5

-3

-2

+6

Assuming all cash-flows occur at the end of each month, approximately how much

interest will Mandel incur for this period?

a.

$20,000 net interest paid.

b.

$53,000 net interest paid.

c.

$76,000 net interest paid.

d.

$195,000 net interest paid.