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?
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.
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.
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
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.
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 ..
alastairk says
Just to let you know the final total for Baumol example C) is $73,500 ($76,000-$2,500).
John Moffat says
No -it is $75,750 (you are forgetting the order cost of $2,250. (Check the printed answer in the lecture notes)
whtan95 says
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?
whtan95 says
isnt it the 100,000 has included in the 1.5m sales of investment?
John Moffat says
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.
nhatanh2197 says
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.
John Moffat says
But the interest each time would only be for 1/10th of a year 馃檪
nhatanh2197 says
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.
John Moffat says
Correct 馃檪
nhatanh2197 says
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.
John Moffat says
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.
nhatanh2197 says
Thank you for your explaination.
John Moffat says
You are welcome 馃檪
no1lover says
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
John Moffat says
Because they are not leaving the money invested all year – they are taking it out, a bit at a time, throughout the year.
no1lover says
Thank you sir for your explanation
John Moffat says
You are welcome 馃檪
msraja90 says
Dear Sir,
Can we be asked about buffer cash ( just like buffer inventory) in the baumol model?
Thanks.
John Moffat says
No – it would be relevant only if you are examined on Miller Orr (not on Baumol).
msraja90 says
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?
John Moffat says
No – effectively it is the lower limit (although we don’t refer to it as the buffer, and neither will the exam).
John Moffat says
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.
usama93 says
Alright so we are considering the average interest we lost during the year . Thank you !
John Moffat says
You are welcome 馃檪
usama93 says
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 ..