Economic order quantity model to management of cash balance

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Reference no: EM13768229

One can apply the concept in the economic order quantity model to the management of cash balance. In this case, the "inventory" is the amount of cash kept in the company, and the "order cost" would be the variable cost associated with ordering cash each time. The "carrying cost" would be the interest rate that one could have earned from investing the spare cash. The "annual usage" would be the cash flow required annually.

Suppose you can invest spare cash in Canadian Treasury bills at an annual interest rate of 6%, but every sale of bills costs you $10. Your firm pays out cash at an expected rate of $10,500 per month. How much Treasury bills that you should sell at one time? How often should you sell the T-bill per month?

a. $2,331.36, 3.1 times a month

b. $3,742.61, 2.0 times a month

c. $6,480.74, 1.6 times a month

d. $5,620.3, 1.5 times a month

Please provide the solution

Reference no: EM13768229

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