Watkins Resources faces a smooth annual demand for cash of $1.67 million, incurs

Question

Watkins Resources faces a smooth annual demand for cash of $1.67 million, incurs transaction costs of $68 every time the firm sells marketable securities, and can earn 3.0 percent on its marketable securities.

What will be its optimal cash replenishment level? (Enter your answer in dollars not in millions. Round your answer to 2 decimal places.)

Watkins Resources faces a smooth annual demand for cash of $1.67 million, incurs transaction costs of $68 every time the firm sells marketable securities, and can earn 3.0 percent on its marketable securities.

Explanation / Answer

The optimal cash replenishment level(OCRL) will be: OCRL= SQRT(2*Annual Demand*Transaction Cost/Interest Earned) SQRT(2*1670000*68/0.03) 87009.58 $87,010

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