Your firm spends $346,000 a week to pay bills and maintains a lower cash balance limit of $150,000.The standard deviation of your disbursements is $28,700.The applicable interest rate is 5 percent and the fixed cost of transferring funds is $60.What is your optimal average cash balance based on the BAT model?

Question

Quizplus · Accepted Answer

The optimal average cash balance is $103,900. This is the point at which the marginal cost of holding cash equals the marginal benefit of holding cash. The marginal cost of holding cash is the interest rate times the average cash balance. The marginal benefit of holding cash is the reduction in transfer costs. The optimal average cash balance is the point at which these two costs are equal.

Your Firm Spends $346,000 a Week to Pay Bills and Maintains