Rose Axels faces a smooth annual demand for cash of 520 mill

Rose Axels faces a smooth annual demand for cash of $5.20 million, incurs transaction costs of $265 every time the company sells marketable securities, and can earn 3.3 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.) Optimal cash $

Solution

Optimal cash replenishment level = ?2Bt/I

Where:

B = Fixed transaction cost = 265

t = Total cash requirement = $5200000

I = Periodic Interest rate = 0.033

Optimal cash replenishment level =?2*265*5200000/0.033 = $288989.88

Optimal cash replenishment level =$288989.88