Question

1.How has technology, changed the way target cash balances are set?

2. Explain how 'Monte Carlo Simulation', can be used to help set a firms target cash balance?

3. What is the 'Baumol model', and how is it used?

4. Why is quality especially important if a Just in Time (JIT), system is used?

5. Describe the relationship between production scheduling and inventory levels?

Thank you.

Answer 1

Target cash balance is defined as the ideal cash balance which a firm intends to keep with it to take care of the cash requirements of the firm so that the firm does not has to face any liquidity problem in the future. However, the firm must strike a balance between the investment opportunity cost of holding too much cash and the balance sheet cost of holding too little. Technology changes have affected the way ideal cash balances are maintained. Today all the investments are done digitally and can be liquidated into cash very easily with the help of technology. For example, liquid funds, short term money market instruments etc. So firms usually prefer to keep some cash in hand and in bank and deploy some into investments which are easily manageable through technology.