Question

Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $75,000. The standard deviation of the disbursements is $12,200. The applicable interest rate is 4.36 percent and the fixed cost of transferring funds is $38. What is the total cost of holding cash based on the BAT model?

Rosie O'Grady's spends $98,000 a week to pay bills and maintains a lower cash balance limit of $75,000. The standard deviation of the disbursements is $12,200. The applicable interest rate is 4.36 percent and the fixed cost of transferring funds is $38. What is the total cost of holding cash based on the BAT model? 0 $4,432 O $3,862 O $2,054 0 $4,911 O $4,109

Answer 1

Rosie O'Grady's spends per week = $98,000

Rosie O'Grady's spends per year = $98,000 * 52

Rosie O'Grady's spends per year (S) = $5,096,000

Interest rate (R) = 4.36% = 0.0436

Fixed cost of transferring funds (F) = $38

Optimal Level of Cash (OLC) :

2*S*F

2+ 5096000 +38 10.0436

387296000 0.0436 V

= V8882935780

= 94249.32774

Therefore, optimum level of cash (OLC) = $94,249.32774

Calculation of Total Cost of Holding Cash:

OLC = $94,249.32774

Interest rate (R) = 0.0436

Total cost of holding cash = (1/2) * (OLC) * R

= 0.5 * (94,249.32774) * 0.0436

= 2054

Therefore, total cost of holding cash = $2,054