Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $75,000. The standard deviation of the disbursements is $12,200. The applicable interest rate is 4.36 percent and the fixed cost of transferring funds is $38. What is the total cost of holding cash based on the BAT model?

Question

Quizplus · Accepted Answer

The total cost of holding cash based on the Baumol-Tobin (BAT) model can be calculated using the formula: Total Cost = (2 * F * T / I)^(1/2) * σ + (I * Z) / 2, where F is the fixed cost of transferring funds, T is the total disbursements, I is the interest rate, σ is the standard deviation of disbursements, and Z is the lower cash balance limit. Plugging in the given values: F = $38, T = $98,000, I = 0.0436, σ = $12,200, and Z = $75,000, we get Total Cost = (2 * 38 * 98,000 / 0.0436)^(1/2) * 12,200 + (0.0436 * 75,000) / 2 = $4,109.

Rosie O'Grady's Spends $98,000 a Week to Pay Bills and Maintains