M/s Sunrise Industries estimates its net cash requirement at Rs. 20 million for the subsequent year. Opportunity cost fund is 15 percent per annum of the Companies. The company will have to incur Rs. 150 per transaction while it converts its short term securities to cash. Find out the optimum cash balance. What is the sum of annual cost of the demand for optimum cash balance? How many deposits will have to be completed throughout the year?
Solution:
C* =√(2bt/I)
C* = √(2 (150) (2,00,000,00)/.15)
= Rs. 2, 00,000
The annual cost will be as:
TC = I (C/2) + B(T/C)
= 0.15 +(2,00,000,00 /2)+ 150 + (2,00,000,00/2,00,000)
= 15,000 + 15,000
= Rs. 30,000
In such financial year thus, the company would have to create 100 conversions.