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 $260,000 but expects the standard deviation in net daily cash flows to be $13,500, the effective annual rate on marketable securities to be 3.2 percent per year, and the trading cost per sale or purchase of marketable securities to be $35.00 per transaction.

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

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $260,000 but expects the standard deviation in net daily cash flows to be $13,500, the effective annual rate on marketable securities to be 3.2 percent per year, and the trading cost per sale or purchase of marketable securities to be $35.00 per transaction.

Explanation / Answer

Daily interest rate = (1+3.2%)1/365 - 1

= 0.00863%

Optimal cash return point = [3 * $35 * ($13,500)2 / (4 * 0.00863%)]1/3 + $260,000

= $298,129.58

Optimal upper cash limit = 3 * $298,129.58 - 2 * $260,000

= $374,388.74

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