MD Groceries currently sets its initial cash balance at $5,000, which is depleted every four days. The current market rate of return is 4.5% per year. The ﬁrm pays $2.50 each time it replenishes its
Cash account. Use a 360-day year.
What is the optimal initial cash balance for MD using the BAT model?

Question

Quizplus · Accepted Answer

The BAT model calculates the optimal cash balance using the formula: sqrt((2 * Transaction Cost * Total Cash Requirement) / Interest Rate). Here, Transaction Cost = $2.50, Total Cash Requirement = ($5,000/4) * 360 = $450,000, and Interest Rate = 4.5%/360. Plugging these values into the formula gives approximately $7,071.

MD Groceries Currently Sets Its Initial Cash Balance at $5,000