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ACCA F9 Cash Management models – The Baumol model
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Just to let you know the final total for Baumol example C) is $73,500 ($76,000-$2,500).
No -it is $75,750 (you are forgetting the order cost of $2,250. (Check the printed answer in the lecture notes)
Sir i still dont get it why would i lose interest of 150,000 at the beginning, then followed by 1.5m after it. why not it just 1.5m for total interest we losing at 9.5% per year?
isnt it the 100,000 has included in the 1.5m sales of investment?
Because they are only selling 150,000 each time, and so they are not losing interest on all the 1.5M for the whole year.
Sir, i have a question:
why when calculating the interest earned, we only take : 150,000/2 x 5% but not : 150,000/2 x 10 x 5% as i think that we deposit 150,000 to the bank account each time so it would be 10 times of deposit a year and consequently the interest would be 10 times of ( 150,000/2 x 5%)?
Thank you for your lectures, i benefit from it a lot.
But the interest each time would only be for 1/10th of a year 馃檪
Yes, because the interest each time is only for 1/10th of a year that’s why we should be multipled by 10 times to get the total interest earned per annum in question a.
Correct 馃檪
i just want to confirm, so the answer in question a is $42,375 instead of $76,125, isnt it?
Thank you very much for your patience.
No – the answer is 76,125 as in my lecture and as printed in the free lecture notes.
You did not read my previous reply properly, the interest is only for 1/10 of a year each time and so is 5%/10 each time.
The total interest earned on the bank balance is 10 x 150,000/2 x 5%/10 = 3,750.
Thank you for your explaination.
You are welcome 馃檪
But what is the purpose of using an average. If we didn’t use any of the 1.5m then we would have generated interest income of 142.5k…Im just trying to make sense out of this arithmetic
Because they are not leaving the money invested all year – they are taking it out, a bit at a time, throughout the year.
Thank you sir for your explanation
You are welcome 馃檪
Dear Sir,
Can we be asked about buffer cash ( just like buffer inventory) in the baumol model?
Thanks.
No – it would be relevant only if you are examined on Miller Orr (not on Baumol).
Thank you sir, is it right to say that the Buffer level of cash is the level of cash at return point according to Miller Orr model?
No – effectively it is the lower limit (although we don’t refer to it as the buffer, and neither will the exam).
After the first sale at the start of the year you are only losing interest on 150,000.
By the end of the year you are losing interest on the whole 1,500,000.
Alright so we are considering the average interest we lost during the year . Thank you !
You are welcome 馃檪
i have a problem understanding the cost of of interest computation at 9.5% . As per the calculations we are taking an average as follows : [ (150,000+1,500,000) / 2 ] . My question is that what purpose does adding the $150,000 amount serve in calculating the average ? im not able to recall the logic for that …. kindly guide me in that ..