Your firm spends $82,000 a week to pay bills and maintain a lower cash balance limit of $40,000. The standard deviation of the disbursements is $8,000. The applicable weekly interest rate is.07 % and the fixed cost of transferring funds is $55. What is your optimal upper cash limit based on the Miller-Orr model?

Question

Quizplus · Accepted Answer

The optimal upper cash limit is $86,693. This is the point at which the marginal cost of holding cash equals the marginal benefit of holding cash. The marginal cost of holding cash is the interest rate times the average cash balance. The marginal benefit of holding cash is the reduction in transfer costs. The optimal upper cash limit is the point at which these two costs are equal.

Your Firm Spends $82,000 a Week to Pay Bills and Maintain