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. Based on the firm's current practice, what is the average daily cash balance (a month has 30 days)?

$50.00

$69.44

$94.44

$138.89

None of these.

Explanation / Answer

Annual Demand (1250*4) 50000 Ordering Cost $           3.50 Holding Cost 8% EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / H = (2 * 50000 * 3.5) / 8% = 2091 units Average Daily Cash Balance = EOQ/30 = 2091.65/30 = 69.72 Hence the correct answer is Option B - $69.72

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