B Corporation uses the Baumol Cash Management model to 

determine  its  optimal cash balance .

For the coming year , the expected cash disbursement  total
P 432,000 . The interest rate  on marketable securities  is  5%
per annum . The fixed cost of selling  marketable securities 
is P 8 per transaction .

Using  the Baumol cash management  model  ,  compute the

optimal   cash balance  and the average cash balance .

Solution:

Optimal cash balance

OC=
√ 2 (Fixed cost of securities)(Expected cash disbursements)
Interest rate

=
√ 2 (8) (432,000)
###

= √ 138,240,000

OC= P11,757.55

Average cash balance

AC= C
2

= 11,757.55
2

AC= P5,878.78