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A company has annual expenditures of $100,000. It costs $100 to convert marketable securities into cash....

A company has annual expenditures of $100,000. It costs $100 to convert marketable securities into cash. The opportunity cost is 10%. What is the optimal cash balance?

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Answer #1

Annual Expenditure(A) = $100,000

Cost of conversion (C) = $100

Opportunity cost of capital (i) = 10%

Optimal cash balance can be calculated by the following formula:

Optimal transaction will be of $14,142.14

Average cash balance will be of half of 14,142.14 ie. $7,071.07

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