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According to Example 2, on The Baumol Model, page 34, Management of Working Capital cash, the Net interest cost of holding cash (NICHC) was 9.5% less 5%. However in Pearl Plc the NICHC is 12% and the solution ignores the 5% to be earned on the current account. Kindly help because I can not understand why the solution has ignored the 5% from current account?
The other question is how come we calculate the $ holding cost as a two part item for earnings lost on capital and interest earned on current accounts. In inventory control it is just EOQ/2 * NICHC.
In the BPP test we are given the formulas for the re oder level (max usage * max lead time), Max level, minimum level and buffer inventory. I have seen these appearing in some exam questions, however our open tuition notes have not significantly highlighted these. I would appreciate any help on these.
I am not happy with the answer to that question either, but it is a very very old exam question (and exam answer) – the only time it was ever asked.
Since the examiner removed the Baumol formula from the formula sheet (many years ago), I really do not think it will ever be asked for numbers. At most it could be worth a brief mention if you were asked to write about managing cash in general.With regard to reorder level etc., these were covered in Paper F2 (and were tested in F2). However, I have not repeated them for F9 – partly because it does not require the learning of formulae, but also because the examiner has never asked for it at F9. Maybe he will in a multiple choice question, but even that I think is doubtful. (I am not even certain that it is the syllabus)
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