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Hi Sir John, Great lecture as always!
I have a question on the example you explained for Baumol’s model –
The cost of interest lost (0.095) and interest earned (0.05) is actually on different average amounts of cash (850,000) and (75,000) respectively in the year. But, still they are cancelled out and a net cost of 4.5 percent is considered in the denominator of the formulae (which means that the company is actually only losing 4.5 percent of 1.5 million investments, but they are actually losing out on more)So, is this also one of the reasons why this model is not really practical, and perhaps a bit flawed?
Although the actual $ interest will be different over the year, every $ earning 5% could have been earning 9.5% had it been left invested.
(It is difficult to be convincing without showing the proof of the formula, but proving it is not in the syllabus and would be wasting time).
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