Why is the optimal average cash balance

Reference no: EM13282298

A=total amount of money deposited
R=monthly interest rate
T=total amount of each withdrawal(fees included)
N=number of times of withdrawal

So the fewer withdrawal the less fees would occur, but the more money left in the bank, the more interest is being earned.

My questions are,
1. Why is the average remaining amount at any given time A/(2n)?
2. Why is the optimal average cash balance (AT/2R)^(1/2)
3. Find the vaule of N that MINIMIZES total costs(transaction costs and lost interest).

Reference no: EM13282298

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