FM8e- ch22 - 22 - 1 CHAPTER 22 Other Topics in Working...

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22 - 1 CHAPTER 22 Other Topics in Working Capital Management Setting the target cash balance EOQ model Baumol Model
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22 - 2 Theoretical models such as the Baumol model have been developed for use in setting target cash balances. The Baumol model is similar to the EOQ model, which will be discussed later. Today, companies strive for zero cash balances and use borrowings or marketable securities as a reserve. Monte Carlo simulation can be helpful in setting the target cash balance. Setting the Target Cash Balance
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22 - 3 Insufficient inventories can lead to lost sales. Excess inventories means higher costs than necessary. Large inventories, but wrong items leads to both high costs and lost sales. Inventory management is more closely related to operations than to finance. Why is inventory management vital to the financial health of most firms?
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22 - 4 All values are known with certainty and constant over time. Inventory usage is uniform over time. Carrying costs change proportionally with changes in inventory levels. All ordering costs are fixed. These assumptions do not hold in the “real world,” so safety stocks are held. Assumptions of the EOQ Model
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22 - 5 Total Total TIC = carrying + ordering = CP(Q/2) + F(S/Q). costs costs C = Annual carrying costs (% of inv.). P = Purchase price per unit. Q = Number of units per order. F = Fixed costs per order. S = Annual usage in units. Total Inventory Costs (TIC)
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Derive the EOQ model from the total cost equation = - = 0 Q 2 = EOQ = Q* = . 2FS
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This note was uploaded on 08/29/2009 for the course FM Finance taught by Professor Unknown during the Spring '09 term at DeVry Addison.

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FM8e- ch22 - 22 - 1 CHAPTER 22 Other Topics in Working...

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