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 total cost of holding cash based on the BAT model?

Question

Quizplus · Accepted Answer

The BAT model calculates the total cost of holding cash as the sum of the opportunity cost and the transaction cost. The formula for the BAT model is: Total Cost = (b/2) * (i) + (T/b) * F, where b is the optimal cash balance, i is the interest rate, T is the total cash needed, and F is the fixed cost per transaction. Solving for b using the formula b = sqrt((2 * T * F) / i), we find b = sqrt((2 * 110,000 * 50) / 0.05) = $50,000. Plugging b into the total cost formula gives Total Cost = (50,000/2) * 0.05 + (110,000/50,000) * 50 = $5,348.

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