Question

# Khan industries experiences regular cash flows of \$50,000 per day as it expands its chain of...

Khan industries experiences regular cash flows of \$50,000 per day as it expands its chain of cheap beer joints across the country to help spread happiness, and joy. The firm incurs a transaction cost of \$100 when it sells its marketable securities and earns 6 percent on its marketable securities portfolio. What is the optimal amount?

Cash Flow per day = \$50,000

Transaction cost on selling its marketable securities = \$100

Return of marketable securities = 6%

Optimal Amount of cash balance = square root of ((2*C*T)/i) =

where C = Annual Cash = \$50,000*365

T = Transaction costs

i = 6%

Optimal Amount of cash balance = square root of ((2*\$50000*365*100)/6%) or ((2*\$50000*365*100)/6%) ^(1/2)

= \$246,644

Optimal Amount = \$246,644

Since the daily balance is \$50,000, the optimal amount will last for only 4.9 days (5 days = \$246,644/\$50,000) after which the account needs to be re-filled.