IFM10 Ch23 Lecture

# IFM10 Ch23 Lecture - Chapter23 OtherTopicsin 1...

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1 Chapter 23 Other Topics in  Working Capital Management

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2 Topics in Chapter Setting the target cash balance EOQ model Baumol Model
3 Setting the Target Cash  Balance 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.

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4 Why is inventory management vital  to the financial health of most firms? 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.
5 Assumptions of the EOQ  Model 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.

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6 Total Inventory Costs (TIC) TIC = Total carrying costs+ total ordering  costs TIC  = CP(Q/2) + F(S/Q). 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.
7 = - = 0 Q 2 = EOQ = Q* = . 2FS CP d(TIC) dQ CP 2 FS Q 2 2FS CP Derive the EOQ model from the  total cost equation

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8 TIC Carrying Cost Ordering Cost 0 EOQ Units \$ Average inventory = EOQ/2. Inventory Model Graph
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## This note was uploaded on 04/08/2011 for the course FIN 360 taught by Professor Smith during the Spring '10 term at Park.

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IFM10 Ch23 Lecture - Chapter23 OtherTopicsin 1...

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