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bala
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| Posted: 02 Feb 2009 at 14:14 | IP Logged
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A company uses the following formula in determining its optimal level of cash.
c=(2bt/i)1/2
* same as EOQ formula(but i cud'nt write the exact formula here)
Where:
b = Fixed cost per transaction
i = Interest rate on marketable securities
T = Total demand for cash over a period of time
This formula is a modification of the Economic Order Quantity (EOQ) formula used for inventory management. Assume that the fixed cost of selling marketable securities is $10 per transaction, and the interest rate on marketable securities is 6 percent per year. The company estimates that it will make cash payments of $12,000 over a one-month period. What is the average cash balance (rounded to the nearest dollar)?
ans is $3,464
plz explain how?
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cpayesican
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| Posted: 02 Feb 2009 at 14:20 | IP Logged
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Answer: square root of [(2 X 12000 X 10)/.005]
the interest rate is .06/12=.005
If you take the square root, the answer is: 6928
Since they have asked for average cash balance, it is 6928/2=3464
Hope that helps!
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bala
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| Posted: 02 Feb 2009 at 14:34 | IP Logged
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Thanks a lot cpayesican. appreciate your help.
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ysjd.patel
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| Posted: 02 Feb 2009 at 19:38 | IP Logged
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hi bala
U can even calculate the above question:
square root of [(2 X 12000 X12 x 10)/.06]
we will get the same answer...:)
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bala
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| Posted: 02 Feb 2009 at 23:12 | IP Logged
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Hi ysjd.patel,
Thanks for helping me out.
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Topic: EOQ
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