Answer (B) is correct . The sum of the beginning balance and inflows exceeds the outflows for the first 2 months. At the end of March, however, Garth must use $2,000,000 of its line of credit ($2,000,000 beginning balance + $6,000,000 inflows – $10,000,000 outflows). Thus, interest for April is $20,000 ($2,000,000 × 1%). The net cash outflow for April (ignoring short-term borrowings) is $1,000,000 of an additional $1,000,000 of the line of credit. However, the $20,000 of interest for April must also be paid, so the amount of the line of credit used in May is $3,020,000 ($2,000,000 + $1,000,000 + $20,000). Interest for May is therefore $30,200 ($3,020,000 × 1%). Given the net cash inflow for May of $2,000,000 (again ignoring short-term borrowings) and the borrowing of $30,200 to pay the interest for May, the amount of the line of credit used in June is $1,050,200. Interest in June is $10,502 ($1,050,200 × 1%), and total interest is $60,702 ($20,000 + $30,200 + $10,502). Consequently, the closest answer is $61,000.
Answer (A) is incorrect because Interest must be paid monthly when the credit line is used in April, May, and June.
Answer (C) is incorrect because The company would repay the credit line at the end of months with a positive cash flow.
Answer (D) is incorrect because The company would repay the credit line at the end of months with a positive cash flow.
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Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1% of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?