Question

The annual cash requirement of A Ltd is 1000000. The company
has marketable securities in lot size of 50000, 100000, 200000.
250000 and 500000. Cost of conversion of marketable security per
lot 1000. 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

Answer 1

A table indicating which lot size will  have to be sold by the company is attached is attached as an image, as it wasn't fitting in this tab.

The economic lot  size can be obtained by the Baumol Model is as follows.

Calculation of Economic lot size (Baumol Model)

$C =\sqrt { \dfrac{2A \times F}{O} }$

where,

A = Annual requirement of cash  

F = Fixed conversion cost per transaction

O = opportunity cost of holding cost

For the given problem, we have

A = 1000000

F = 1000

O = 5% = 5/100 = 0.05

$\therefore C = \sqrt { \dfrac{2(1000000) \times 1000 }{0.05}$

Therefore, C = Rs. 200000.