During any month, Cashco has a.5 chance of receiving a $1,000 cash outflow. For every $1,000 in cash on hand at the end of the month, Cashco incurs a $15 cost (due to lost interest). At the beginning of each month, Cashco can adjust its on-hand cash balance upward or downward with the cost per transaction being $20. Cashco can never let the on-hand balance become negative. The company is considering the following two cash management policies:
Policy 1 At the beginning of a month in which on hand cash is $3,000, immediately reduce the cash balance to $1,000. At the beginning of a month in which the on-hand cash balance is $0, immediately being the on-hand cash balance up to $1,000.
Policy 2 At the beginning of a month in which the on-hand cash balance is $4,000, immediately reduce the cash balance to $2,000. At the beginning of a month in which the on-hand cash balance is $0. Immediately bring the on-hand cash balance up to $2,000
Which policy will incur a smaller expected monthly cost (opportunity plus transaction)? The sequence of events during each month is as follows:
??????????? a????????? Observe beginning cash balance
??????????? b????????? Adjust (if desired) cash balance
??????????? c?????????? Cash balance changes
??????????? d????????? Opportunity cost is assessed
I'm trying to understand how to begin the stochastic/markov models for this problem.
This question was answered on: Sep 18, 2020
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