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CS Executive · Corporate Accounting and Financial Management · Working Capital Management

Ananya Textiles expects to need Rs 4,50,000 of cash evenly over the next year. Each sale of securities to raise cash costs Rs 50, and the interest rate on securities is 10% per annum. Using the Baumol model, what is the optimal cash conversion size?

Using C = sqrt(2UP/S) with U = 4,50,000, P = 50 and S = 10%, the optimal conversion size works out to about Rs 21,213, so none of the listed options is exact.

  1. ARs 30,000Correct
  2. BRs 15,000
  3. CRs 3,00,000
  4. DRs 22,500

Explanation

Optimal C = sqrt(2 x U x P / S) = sqrt(2 x 4,50,000 x 50 / 0.10) = sqrt(4,50,00,000 x ... ) computed stepwise: 2 x 4,50,000 x 50 = 4,50,00,000; divided by 0.10 = 45,00,00,000; square root = 21,213, which is not clean, so check: 2 x 450000 x 50 = 45,000,000; divided by 0.10 = 450,000,000; sqrt = 21,213. This does not match, so the stated key is wrong.

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