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Operations Management

Christy maintains her inventory levels by borrowing cash on daily basis from the bank. She estimates the demand for cash for the coming year will be $17,000 per day for 305 working days. Any money she borrows must be repaid with 9% annual interest. Each time Christy takes out a loan the bank charges a loan origination fee of $1200 plus 2.25% of the amount borrowed. She is wondering if she can use EOQ analysis to determine an optimal borrowing policy.

Determine the amount of the loan Christy should borrow, the total annual cost of the company's borrowing policy, and the number of loans the company should obtain during the year.

Additionally, on any loan amount equal to or greater than $500,000 the bank will lower the points on the loan origination fee from 2.25% to 2%. Then what would be the company's optimal amount borrowed?

Solution Preview

EOQ = SQRT ( 2DC / H) where

D = Annual Demand = 17,000 x 305 = $5,185,000
C = ordering cost = $1200 (note : 2.25% amount that bank charges is not considered in EOQ as no matter what quantities you borrow the ...

$2.19