BUSI 2503 Study Guide - Final Guide: Economic Order Quantity, Bank Charge, William Baumol
29 Mar 2020
School
Department
Course
Professor
BUSI 2503R Introduction to Finance
Lecture 11 Practice Questions-Solution
Chapter 21:
1. a. The lock-box reduces collection float by
300 payments per day ´ $1500 per payment ´ 2 days = $900,000.
Daily interest saved is .00015 ´ $900,000 = $135.
The bank charge each day is: 300 payments per day ´ $.40 per payment = $120.
The lock-box is worthwhile; interest earnings exceed the bank charges.
b. Break-even occurs when interest earned equals the bank fees:
.00015 ´ [300 ´ 1500 ´ Days saved] = $120
Days saved = 1.78
2. a. Optimal initial cash balance, from the Baumol model, equals
Q = 2 ´ 200,000 ´ 20
.02 = $20,000
So the firm should sell securities for cash 200,000/20,000 = 10 times per year.
b. The average cash balance is $20,000/2 = $10,000.
4. a. Collection float decreases by $10,000 per day ´ 2 days saved = $20,000.
b. Daily interest saving = .0002 ´ 20,000 = $4
c. Monthly savings = 30 ´ $4 = $120. This is the maximum fee Sherman’s should pay.
Please note that we should always consider using time value of money concepts.
6. Sales = 200 per month
Carrying cost = $1 per month per gem
Order cost = $20
Q* = 2 ´ 200 ´ 20
1 = 89.4
Document Summary
Lecture 11 practice questions-solution: the lock-box reduces collection float by. 300 payments per day per payment 2 days = ,000. Daily interest saved is . 00015 ,000 = . The bank charge each day is: 300 payments per day $. 40 per payment = . The lock-box is worthwhile; interest earnings exceed the bank charges: break-even occurs when interest earned equals the bank fees: . 00015 [300 1500 days saved] = . Days saved = 1. 78: optimal initial cash balance, from the baumol model, equals. This is the maximum fee sherman"s should pay. Please note that we should always consider using time value of money concepts. Carrying cost = per month per gem. The economic order quantity is only about 90 gems, which is less than one-half of a month"s sales. The firm should place smaller but more frequent orders: economic order quantity = 2 order cost purchases carrying cost: total costs = order costs + carrying costs.
