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A firm maintains a separate account for cash disbursements. Total disbursements are $98,000 per month, spread...

A firm maintains a separate account for cash disbursements. Total disbursements are $98,000 per month, spread evenly over the month. Administrative and transaction costs of transferring cash to the disbursement account are $16 per transfer. Marketable securities yield 2% per month. Determine the size and number of transfers that will minimize the cost of maintaining the special account.(Round your answer for the size of transfers to the nearest whole dollar and round your answer for number of transfers to 2 decimal places.)

                   

  Optimal size of transfers   

                         

  Average number of transfers per month   
business   accounting   
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Answer #1

The formula for determining optimum cash balance is

C = √(2 U × P/S)

Where, C = Optimum cash balance

U = Annual (or monthly) cash disbursement

P = Fixed cost per transaction

S = Opportunity cost of one rupee p.a. (or p.m.)

So, C = √(2 * 98000 * 16 /0.02 = $ 12522.

b) Average transfers per month => monthly disbursement/ optimum cash balance ie.

98000/12522 = 7.83 or 8 Transfers.

(Please comment in case of any query regarding the solution)

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