Picard Industries requires $250,000 a week to pay its bills. The fixed cost of transferring money is $65 per transfer. The standard deviation of the weekly cash flows is $25,000 and the lower cash balance limit is $40,000. Assume the applicable annual interest rate is 5% for the BAT model, and the applicable weekly interest rate is 0.1% for the Miller-Orr model.

Using the BAT model, what is the optimal average cash balance?

Question

Using the BAT model, what is the optimal average cash balance?

Quizplus · Accepted Answer

The BAT model (Baumol-Tobin model) calculates the optimal cash balance using the formula: sqrt((2 * Fixed Cost * Cash Requirement) / Interest Rate). Plugging in the values: sqrt((2 * $65 * $250,000) / 0.05) gives approximately $91,924.

Picard Industries Requires $250,000 a Week to Pay Its Bills