Donaldson, Inc. spends $79,000 a week to pay bills and maintains a lower cash balance limit of $20,000. The standard deviation of the disbursements is $10,000. The applicable weekly interest
Rate is .05 percent and the ﬁxed cost of transferring funds is $45. What is your cash balance target
Based on the Miller-Orr model?

Question

Quizplus · Accepted Answer

The Miller-Orr model calculates the target cash balance using the formula: Target Cash Balance = Lower Limit + (1/3 * (3/4 * Fixed Cost * Variance of Cash Flows / Interest Rate)^(1/3)). Plugging in the values: Lower Limit = $20,000, Fixed Cost = $45, Variance = $10,000^2, Interest Rate = 0.0005, the target cash balance is approximately $38,897.