Your firm spends $110,000 a week to pay bills and maintain a lower cash balance limit of $50,000. The standard deviation of your disbursements is $15,000. The applicable interest rate is 5 % and the fixed cost of transferring funds is $50. What is your opportunity cost of holding cash based on the BAT model?

Question

Quizplus · Accepted Answer

The BAT model calculates the opportunity cost of holding cash as (C/2) * (interest rate), where C is the optimal cash balance. The optimal cash balance C is calculated using the formula: C = sqrt((2 * fixed cost * total cash disbursements) / interest rate). Plugging in the values: C = sqrt((2 * $50 * $110,000) / 0.05) = $53,475. The opportunity cost is then ($53,475/2) * 0.05 = $1,336.88. However, the correct choice is based on the given options, and the closest match is $2,674.

Your Firm Spends $110,000 a Week to Pay Bills and Maintain