Mechanical System’s controller prepared the following Statements of Cash Flows (in thousands of dollars) for the past two years, the current year and the upcoming year (2001):

BUDGET

Net cash flows from operating activities

Net income

$41,700

$39,200

$43,700

$45,100

Add net reconciling items

2,200

4,300

3,000

4,000

Total

$43,900

$43,500

$46,700

$49,100

Net cash flows from investing activities

Purchase of plant and equipment

($18,700)

($12,200)

($4,600)

Sale (purchase) of investments

8,700

($3,600)

12,600

15,800

Other investing inflows

1,200

800

600

2,400

Total

($8,800)

($2,800)

($24,200)

($18,000)

Net cash flows from financing activities

Payment of notes payable

($12,000)

($24,000)

($15,000)

($7,000)

Payment of dividends

20,000

7,000

13,300

20,000

Total

($32,000)

($31,000)

($28,300)

($27,000)

Net change in cash

$3,100

$9,700

($5,800)

$4,100

After preparation of the above budgeted SCF for 2001, Leslie Nelson, the company president, asked you to recompile it based on a separate set of facts. She is evaluating a proposal to purchase a local area network (LAN) computer system for the company at a total cost of $50,000. The proposal has been deemed to provide a satisfactory rate of return. However, she does not want to issue additional stock and she would prefer not to borrow any more money to finance the project. Projecting the market value of the accumulated investments for the previous three years ($3,600 and $12,600) reveals an estimate that these investments could be liquidated for $18,400. Ms. Nelson said the investments scheduled for 2001 did not need to be purchased and that dividends could be reduced to 40 percent of the budgeted amount. These are the only changes that can be made to the original forecast.

a. Evaluate the cash trends for the company during the 1998–2000 period.

b. Giving effect to the preceding changes, prepare a revised 2001 budgeted Statement of Cash Flows and present the original and revised in a comparative format.

c. Based on the revised budgeted SCF, can the LAN computer system be purchased if Ms. Nelson desires an increase in cash of at least $1,000?

d. Comment on the usefulness of the report prepared in part (b) to Leslie Nelson.