A company needs $1.5m of cash for payments over the next year, spread evenly over the year. Each sale of short-term investments to raise cash costs $40, and the investments earn interest at 5% a year. Using the Baumol model, what is the optimal amount of investments to sell each time cash is needed (to the nearest $)?

Correct answer: D) $48,990

Explanation

Baumol optimal transfer Q = square root of (2 x C x S / i) = square root of (2 x 40 x 1,500,000 / 0.05) = square root of 2,400,000,000 = $48,990 (to the nearest $). The model applies EOQ logic to cash, where C is the transaction cost, S the annual cash requirement and i the interest rate earned on investments. $24,495 is the average cash balance (Q/2), not the transfer size.