Your firm needs $135,000 a week to pay bills. The standard deviation of the weekly disbursements is $12,000. The firm has established a lower cash balance limit of $60,000. The applicable interest rate is 5 % and the fixed cost of transferring funds is $45. What is the opportunity cost of holding cash?

Question

Quizplus · Accepted Answer

The opportunity cost of holding cash is calculated using the formula: (Average cash balance) x (Interest rate). The average cash balance is calculated as: (Lower limit + Optimal cash balance) / 2. The optimal cash balance can be calculated using the Miller-Orr model, but since it's not provided, we assume the average cash balance is the lower limit. Thus, the opportunity cost is $60,000 x 0.05 = $3,000. However, the closest option is $2,810, which might account for a more precise calculation or assumptions not detailed here.

Your Firm Needs $135,000 a Week to Pay Bills