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 optimal average cash
Balance based on the Miller-Orr model?

Question

Quizplus · Accepted Answer

The Miller-Orr model calculates the optimal average cash balance using the formula: Optimal cash balance = Lower limit + (3/4 * (3 * transaction cost * variance of cash flows / interest rate)^(1/3)). Plugging in the given values: Lower limit = $20,000, transaction cost = $45, variance = $10,000^2, and interest rate = 0.0005, the optimal average cash balance is approximately $45,196.