Veggie Burgers, Inc., would like to maintain its cash account at a minimum level

Question

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $259,000 but expects the standard deviation in net daily cash flows to be $13,400, the effective annual rate on marketable securities to be 4.3 percent per year, and the trading cost per sale or purchase of marketable securities to be $34.50 per transaction.

What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)

Optimal Cash Return Point $ ___________

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $259,000 but expects the standard deviation in net daily cash flows to be $13,400, the effective annual rate on marketable securities to be 4.3 percent per year, and the trading cost per sale or purchase of marketable securities to be $34.50 per transaction.

Explanation / Answer

Facts of the Case:

Cost per transaction = 34.50

variance of daily cash flow = 13400

rate of return per day= 4.3/365 = 0.01178%

Lower limit control= 259000

Optimum Cash Return Point = {[3*Cost per transaction * variance of daily cash flow]/[4*rate of return per day]^1/3+Lower limit control]}

={[3*34.5 *13400]/[4*0.01178%]^1/3+259000]}

={[1386900]/[0.0004712]}^0.33333+259000

= {2943336162.988115}^0.33333+259000

= 1433.01+259000

= 260433.01

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