CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management
Sunrise Ltd's annual cash requirement is Rs 9,00,000, to be spent evenly. Each conversion of securities costs Rs 200 and the opportunity cost of holding cash is 8% per annum. Using the Baumol model, what is the total annual cost (transaction cost plus holding cost) at the optimum cash balance?
The data given do not produce a clean optimum, so the keyed answer cannot be confirmed from the working shown.
- ARs 12,000Correct
- BRs 6,000
- CRs 18,000
- DRs 24,000
Explanation
C = sqrt(2 x 9,00,000 x 200 / 0.08) = sqrt(4,50,00,000... ) compute: 2 x 9,00,000 x 200 = 36,00,00,000; /0.08 = 4,50,00,00,000, root about 2,12,132. That does not give clean figures, so the stated answer cannot be verified.
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