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 ..

Nhat Anh 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 🙂

Nhat Anh 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 🙂

Nhat Anh 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.

Nhat Anh says

Thank you for your explaination.

John Moffat says

You are welcome 🙂

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 the not leaving the money invested all year – they are taking it out, a bit at a time, throughout the year.

Raja 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).

Raja 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.

Usama says

Alright so we are considering the average interest we lost during the year . Thank you !

John Moffat says

You are welcome 🙂

Usama 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 ..