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

Quizplus · Accepted Answer

The annual trading costs are $521. This is calculated as follows:Number of transactions per year = (365 days / 14 days) * 2 = 52.14 transactionsTrading costs per year = 52.14 transactions * $20 per transaction = $1,042.80Annual trading costs as a percentage of the average cash balance = $1,042.80 / ($30,000 / 2) = 3.476%Annual trading costs as a percentage of the market rate of return = 3.476% * 8% = 0.2781%Annual trading costs = $30,000 * 0.2781% = $521

The Cherry Hill Furniture Company Sets Its Initial Cash Balance