The Moon Hotel spends $157,300 a week to pay bills and maintains a lower cash balance limit of $50,000. The standard deviation of the disbursements is $11,307. The applicable weekly interest rate is 0.043 percent and the fixed cost of transferring funds is $44. What is the optimal upper cash limit based on the Miller-Orr model?

Question

Quizplus · Accepted Answer

The optimal upper cash limit is $114,225. This is because the Miller-Orr model takes into account the trade-off between the cost of holding cash and the cost of transferring funds. The optimal upper cash limit is the point at which the marginal cost of holding cash is equal to the marginal cost of transferring funds.

The Moon Hotel Spends $157,300 a Week to Pay Bills