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Green Company uses the Baumol model to manage its disbursement account. Monthly cash disbursement is P1,200,000. Cash in this account could have earned 5% on money marketable securities. Green incurs P576 every time cash is transferred to this account. The optimum cash balance is  A. 576,000.00 B. 166,276.88 C. 124,707.66 D. 432,000.00

Green Company uses the Baumol model to manage its disbursement account. Monthly cash disbursement is P1,200,000. Cash in this account could have earned 5% on money marketable securities. Green incurs P576 every time cash is transferred to this account. The optimum cash balance is  A. 576,000.00 B. 166,276.88 C. 124,707.66 D. 432,000.00

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Green Company uses the Baumol model to
manage its disbursement account. Monthly
cash disbursement is P1,200,000. Cash in this
account could have earned 5% on money
marketable securities. Green incurs P576
every time cash is transferred to this account.
The optimum cash balance is 

A. 576,000.00
B. 166,276.88
C. 124,707.66
D. 432,000.00

Expert Solution
Step 1

Optimum Cash balance: It refers to that cash amount where total cost of the firm is lowest and opportunity cost of firm is equal to its transaction costs. It is the part of the cash management where two models are given to find out the optimum cash balance. One is Baumols model of cash management and other one is miller-orr model. 

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