Theo's Bar & Grill needs $153,000 a week to pay bills.The standard deviation of the weekly disbursements is $9,600.The firm has established a lower cash balance limit of $40,000.The applicable interest rate is 3.5 percent and the fixed cost of transferring funds is $40.Based on the BAT model,what is the optimal average cash balance?

Question

Quizplus · Accepted Answer

Using the BAT model formula, we get:

Optimal Average Cash Balance = (√(2 × Annual Cash Needs × Fixed Cost of Transfer) / (Interest Rate × σ)) + Lower Cash Balance Limit
= (√(2 × 153,000 × 40) / (0.035 × 9,600)) + 40,000
= 67,426.26

Therefore, the optimal average cash balance is $67,426. Option C is the correct answer.

Theo's Bar & Grill Needs $153,000 a Week to Pay