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Minimum cost cash balance

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Hott Inc. receives a $2 million payment once a year. Of this amount, $800,000 is needed for cash payments made during the next year. Each time Hott deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Hott can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

A. $7,483
B. $1000
C. $3,700
D. $700
E. $400

Reference no: EM131318661

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