The Timberline firm expects a total cash need of $12,500 over the next 3 months.

Question

The Timberline firm expects a total cash need of $12,500 over the next 3 months. They have a beginning cash balance of $1,500, and cash is replenished when it hits zero. The fixed cost of selling securities to replenish cash balances is $3.50. The interest rate on marketable securities is 8% per annum. There is a constant rate of cash disbursement and no cash receipts during the month.

1) What is the total opportunity cost per month with the firm's current practice?
2) How many times during the next 3 months will the cash balance be replenished

Explanation / Answer

Average daily cash balance = [($1,500 + $12,500)/2]/90

                                        = $77.78

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