FM12 Ch 28 Tool Kit - A 1 2 3 4 7 8 9 10 11 12 13 14 15 16...

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9/20/2006 Chapter 28. Tool Kit for Advanced Issues in Cash Management and Inventory Control THE BAUMOL MODEL The Baumol Model is used for determining optimal cash balances. Weekly cash expenditure $1,000,000 Weekly cash inflows $900,000 Net weekly cash outflows $100,000 C = amount of cash raised by selling marketable securities or by borrowing = $400,000 C/2 = average cash balance $200,000 Frequency of transfer (weeks 4 Data for Table 28-1 are on the Worksheet Tab Data 28-1 Costs F = fixed costs of selling securites or obtaining loan = $150 T = total amount of net new cash needed during a year = $5,200,000 r = opportunity cost of holding cash = 15% # of transactions per year = 13.00 Holding costs =Average cash balance * r = $30,000 Transactions costs = # of transactions * Cost per transaction $1,950 Total cost = Holding costs + Transactions costs = $31,950 Optimal cash transfer = (2*F*T/r).5 = $101,980 Costs as a fu Transfer am $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 $200,000 $220,000 $240,000 $260,000 $280,000 $300,000 $320,000 $340,000 In Chapters 22 and 27, we addressed the topic of working capital management and short-term financing. In this chapter, we extend those analyses to several more advanced issues, including: (1) the target cash balance, (2) accounting for inventory, (3) the EOQ model for inventory, and (4) monitoring the receivables position. SETTING THE TARGET CASH BALANCE (Section 28.2) 0 3 6 9 12 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 $400,000 $450,000 Figure 28-1 Cash Balances Weeks Cash Balances $0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 Figure 28-2 Cash Transferred ($) Costs of Holding Cash ($) Total Costs of Holding Cash Opportunity Cost Transactions Cost A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72
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$360,000 $380,000 $400,000 $420,000 Specific Identification
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FM12 Ch 28 Tool Kit - A 1 2 3 4 7 8 9 10 11 12 13 14 15 16...

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