The Cherry Hill Furniture Company sets its initial cash balance at $30,000. This amount is evenly disbursed over a 14-day period. As soon as the account is depleted another $30,000 is deposited. The costs of replenishing the account are $20 per transaction. The market rate of return is 8%. Use a 365-day year.

What are the annual trading costs associated with this account?

Question

What are the annual trading costs associated with this account?

Quizplus · Accepted Answer

The annual trading costs are calculated by dividing the total annual cash requirement by the amount per transaction and then multiplying by the cost per transaction. Here, $30,000 is replenished every 14 days, so there are 365/14 transactions per year. The cost per transaction is $20. Thus, the annual trading cost is (365/14) * $20 = $521.43, which rounds to $521.

The Cherry Hill Furniture Company Sets Its Initial Cash Balance