Question

A. AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $5600 per day, and is open for business 365 days in the year. Each time the firm sells securities to obtain the cash, it costs them $270. The interest rate is 2.40%. What are the annual storage costs associated with the EOQ?

B. AIA Inc. is looking to manage its cash position using the EOQ model. The company is consuming cash at the rate of $5900 per day, and is open for business 365 days in the year. Each time the firm sells securities to obtain the cash, it costs them $230. The interest rate is 2.50%. What are the total costs (annual storage costs + annual order costs) associated with the EOQ?

Answer 1

A)	EOQ = (2*A*C/i)
	where
	A = Total cash required during the year
	C = Cost of each transaction between cash and marketable securities.
	I = Rate of interest
	Substituting values, we have
	EOQ = (2*5600*365*270/0.024)^0.5 =	$      214,453
	Annual storage cost = (214453/2)*0.024 =	$           2,573
B)	EOQ = (2*5900*365*230/0.025)^0.5 =	$      199,059
	Annual storage cost = (199059/2)*0.025 =	$           2,488
	Annual order costs = (5900*365/199059)*230 =	$           2,488
	Total costs	$           4,976
	Alternatively, Total costs = (2*5900*365*230*0.025)^0.5 =		$          4,976