Problems on Cash Management Baumol Models

Problem 1: ABC Ltd. has estimated that use of Rs. 24 lakhs of cash
during the next budgeted year. It intends to hold cash in a commercial
bank which pay interest @ 10% p.a. For each withdrawal, the company
incurs expenditure of Rs. 150. What is the optimal size for each
withdrawal?

Problem 2: The annual cash requirement of A Ltd. is Rs 10 lakhs. The

company has marketable securities in lot sizes of Rs 50,000, Rs 1,
00,000, Rs 2, 00,000, Rs 2, 50,000 and Rs 5, 00,000. Cost of conversion
of marketable securities per lot is Rs 1,000. The company can earn 5%
annual yield on its securities. You are required to prepare a table
indicating which lot size will have to be sold by the company. Also show
that the economic lot size can be obtained by the Baumol Model.

Problem 3: A company has a policy of maintaining a minimum cash

balance of Rs 1, 00,000. The standard deviation in daily cash balances is
Rs 10,000. The interest rate on a daily basis is 0.01%. The transaction
cost for each sale or purchase of securities is Rs 50. Compute the upper
control limit and the return point as per the Miller-Orr model.