The Timberline ﬁrm expects a total need of €12,500 over the next 3 months.They have a beginning cash balance of €1,500, and cash is replenished when it hits zero.The ﬁxed cost of selling
Securities to replenish cash balances is €3.50.The interest rate on marketable securities is 8% per
Annum.There is a constant rate of cash disbursement and no cash receipts during the month.
Based on the ﬁrm's current practice, how many times during the next 3 months will the cash balance
Be replenished?

Question

Quizplus · Accepted Answer

To calculate the number of times the cash balance will be replenished, we need to determine the maximum amount of time before the cash balance hits zero.

Starting cash balance = €1,500 
Total cash needed = €12,500 
Monthly cash disbursement = €12,500/3 = €4,166.67

Assuming no cash receipts during the month, the maximum time before the cash balance hits zero will be:
Time = Starting cash balance / Monthly cash disbursement
Time = €1,500 / €4,166.67 = 0.36 months

Since the maximum time before the balance hits zero is less than one month, the cash balance will be replenished every month.

The cost of replenishing cash using securities is €3.50 per transaction, and since we know the balance will be replenished eight times (3 months/0.36 months), the total cost will be:
Total cost = Number of transactions x Cost per transaction
Total cost = 8 x €3.50 = €28

Therefore, the cash balance will be replenished 8.33 times (rounded up to the nearest whole number) and the best choice is C.

The Timberline ﬁRm Expects a Total Need of €12,500 Over