AJ's spends $327,800 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of its disbursements is $36,900. The applicable interest rate is 3.48 percent and the fixed cost of transferring funds is $58. What is the optimal average cash balance based on the BAT model?

Question

Quizplus · Accepted Answer

The optimal average cash balance based on the BAT model is $119,183. This is because the BAT model takes into account the trade-off between the cost of holding cash and the cost of transferring funds. In this case, the cost of holding cash is 3.48 percent of the average cash balance, while the cost of transferring funds is $58. The optimal average cash balance is the point at which the cost of holding cash is equal to the cost of transferring funds.

AJ's Spends $327,800 a Week to Pay Bills and Maintains