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 percent
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 opportunity cost of holding cash in the BAT model is calculated using the formula: (C/2) * (i), where C is the optimal cash balance and i is the interest rate. The optimal cash balance (C) is calculated as: sqrt((2 * F * T) / i), where F is the fixed cost of transferring funds, T is the total cash needed, and i is the 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 answer should be $2,674, which suggests a calculation error or misinterpretation in the question setup.

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