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Pure Gold Corporation expects to make monthly cash payments of P 8,640,000
Pure Gold Corporation expects to make monthly cash payments of P 8,640,000.00, evenly during the year. The average return on money market placement is 6.21 % per annum and it expects P 23.00 transaction costs per cash transfer.
Using the Baumol Cash management Model, what is the average cash balance?
Compute the total Transaction cost using the optimal cash balance?
Using the Baumol Cash Management model, what is the company’s optimal cash balance?
Pure Gold Corporation expects to make monthly cash payments of P 8,640,000.00, evenly during the year. The average return on money market placement is 6.21 % per annum and it expects P 23.00 transaction costs per cash transfer.
Using the Baumol Cash management Model, what is the average cash balance?
Compute the total Transaction cost using the optimal cash balance?
Using the Baumol Cash Management model, what is the company’s optimal cash balance?
Expert Solution
1. Average Cash Balance by using Baumals Cash Management Model:-
Beginning Cash balance P277128
Ending Cash balance P0
Average Cash Balance = (P277128+ P0)/2
=P138564
2. Optimum Cash Balance
C= 
√(2AF)/O
Where,
C= Optimum Cash balance
A= Annual Cash disburshment=P8640000 ×12=P103680000
F= Fixed Cost per Transaction =P23.00
O= Opportunity cost for P1 p.a.=6.21%=0.0621
therefore,C=√(2AF)/O
=√(2×P103680000×P23)/0.0621
=P277128.
Total transaction Cost:-
A = Annual Cash Disburshment=P103680000
Optimunm Cash Balance = P277128
Cost per transaction =P23.00
Opportunity Cost = Average optimum cash balance × 6.21%
=P277128/2 ×6.21%
=P8605
No of Transactions=P103680000/P277128=374.12 or 375 times
Total Transaction Cost = P23 × 375 times
=P8625
3.Total trading Cost= Opportunity Cost + Transaction cost
=P8605 + P8625
=P17230
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