Mathematics · Financial Mathematics
A company is using the Baumol model for cash management and the Economic Order Quantity (EOQ) model for inventory. It has the following data: - Annual cash outflow: $1,500,000 - Interest rate on short-term investments: 5% per annum - Cost of converting investments to cash: $150 per transaction - Annual inventory demand: 1,000,000 units - Inventory holding cost: $0.50 per unit per year - Ordering cost: $200 per order Calculate the optimal cash transaction size and the economic order quantity (EOQ) for the product (rounded to the nearest whole numbers).
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Optimal cash transaction size: $94,868; EOQ: 28,284 units✓
- 2Optimal cash transaction size: $75,000; EOQ: 25,000 units
- 3Optimal cash transaction size: $30,000; EOQ: 40,000 units
- 4Optimal cash transaction size: $110,000; EOQ: 28,000 units
Correct answer
Optimal cash transaction size: $94,868; EOQ: 28,284 units
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