ExpertMedium2 marksMultiple Choice
ACCA · Question 5 · Working Capital Management
Section A
CryptoFlow is a digital asset exchange that needs to manage its fiat currency reserves. It requires $2,000,000 in fiat cash steadily over the next year. The cost of converting digital assets to fiat (transaction cost) is $50 per conversion. The opportunity cost of holding fiat cash is 5% per annum.
Using the Baumol model, what is the optimum amount of fiat cash CryptoFlow should transfer in each transaction? (Round to the nearest whole number).
Section A
CryptoFlow is a digital asset exchange that needs to manage its fiat currency reserves. It requires $2,000,000 in fiat cash steadily over the next year. The cost of converting digital assets to fiat (transaction cost) is $50 per conversion. The opportunity cost of holding fiat cash is 5% per annum.
Using the Baumol model, what is the optimum amount of fiat cash CryptoFlow should transfer in each transaction? (Round to the nearest whole number).
Answer options:
A.
$44,721
B.
$63,246
C.
$89,443
D.
$200,000
How to approach this question
Apply the Baumol cash management model formula: Q = √(2CS / i), where C = transaction cost, S = annual cash requirement, and i = holding cost.
Full Answer
B.$63,246✓ Correct
The Baumol model calculates the optimum cash balance. Formula: Q = √(2CS / i).
C = $50
S = $2,000,000
i = 0.05
Q = √((2 * 50 * 2,000,000) / 0.05) = √(200,000,000 / 0.05) = √4,000,000,000 = 63,245.55. Rounded to $63,246.
Common mistakes
Forgetting to convert the percentage (5%) into a decimal (0.05) before dividing.
Practice the full ACCA FM — Financial Management Practice Exam 1
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