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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Anand Ltd expects annual cash needs of ₹3,60,000, spread evenly. Each conversion of securities to cash costs ₹250 and the opportunity cost of holding cash is 10% per annum. Under the Baumol model, the optimal cash balance per conversion is:

Applying the Baumol formula, the square root of twice annual cash need times conversion cost divided by the interest rate gives about ₹42,426 per conversion. This corresponds to the second option, not ₹60,000 which would ignore the correct root.

  1. A₹60,000Correct
  2. B₹42,426
  3. C₹1,80,000
  4. D₹30,000

Explanation

C = sqrt(2 × 3,60,000 × 250 / 0.10) = sqrt(18,00,00,000 / 0.10) = sqrt(1,80,00,00,000)? Check: 2×3,60,000×250 = 18,00,00,000; divided by 0.10 = 180,00,00,000 = 1.8×10^9; sqrt = 42,426. So the correct answer is ₹42,426.

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