Question

Watkins Resources faces a smooth annual demand for cash of $1.63 million, incurs transaction costs of $72 every time the firm sells marketable securities, and can earn 3.4 percent on its marketable securities.

What will be its optimal cash replenishment level? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

Optimal cash

$

Answer 1

Given Annual Demand Transaction Cost Earning on marketable securities 1630000 $ 72 $ 3.40% Solution We know that Optimum Cash Replenishment Level can be represented as follows:- Optimum Cash Replenishment Level = Annual Demand X Transaction Cost Marketable security return Optimum Cash Replenishment Level = 117360000 3.40% that is square root of 3451764706 Optimum Cash Replenishment Level = Optimum Cash Replenishment Level = 3451764706 ^ 0.5 58751.72 Hence, Optimum Cash Replenishment Level is $ 58751.72