The Timberline firm expects a total need of €12,500 over the next 3 months.They have a beginning cash balance of €1,500,and cash is replenished when it hits zero.The fixed cost of selling securities to replenish cash balances is €3.50.The interest rate on marketable securities is 8% per annum.There is a constant rate of cash disbursement and no cash receipts during the month. Based on the firm's current practice,what is the average daily cash balance (a month has 30 days)?

Question

Quizplus · Accepted Answer

The firm needs €12,500 over 3 months, which is €4,166.67 per month. With a beginning balance of €1,500, they will need to replenish cash when it hits zero. The average cash balance is half of the cash cycle amount, which is €4,166.67/2 = €2,083.33. Dividing by 30 days gives an average daily cash balance of €69.44. However, considering the cost of selling securities and interest, the correct average daily cash balance is €94.44.

The Timberline Firm Expects a Total Need of €12,500 Over