BullsNBears, a purveyor of ﬁnancial databases, estimates it they disburses $440,000 monthly in order to pay bills. The ﬁrm's opportunity rate is 5%. The ﬁxed cost of transferring money is $25 per
Transfer. Based on historical data, the standard deviation of monthly cash ﬂows is $15,000 and the
Lower cash balance limit is $20,000. For Miller-Orr model questions, assume the interest rate is
0)5% per month.
Using the Miller-Orr model, what is the optimum upper limit?

Question

Quizplus · Accepted Answer

The Miller-Orr model calculates the optimal upper limit using the formula: Upper Limit = Lower Limit + 3 * (3/4 * Transaction Cost * Variance of Cash Flows / Interest Rate)^(1/3). Plugging in the values: Lower Limit = $20,000, Transaction Cost = $25, Variance = $15,000^2, Interest Rate = 0.005, the calculation gives approximately $48,347.

BullsNBears, a Purveyor of ﬁNancial Databases, Estimates It They Disburses