Question - You need to establish a cash management policy. The first step toward establishing it, is to decide about your target cash balance.
You know that you need a minimum of $10,000 in your cash account. You also know that every time you buy or sell securities, it costs you $300.
The opportunity cost of holding cash for your company is10% per year. Based on the last five years of data, the standard deviation of daily net cash flows for the company is $4000.
a. What would your target cash balance be? Show work.
b. Determine the upper control limit and the average cash balance.
c. What is the annual cost of carrying this level of cash?
d. Assuming that you still intend to maintain the lower limit of $10,000 and the upper limit determined in part (b), what is the average cash balance during the year?
e. What is the annual cost of carrying this level of cash?