FM12 Ch 28 Tool Kit

# 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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