The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash

QUESTION

The management of the Book Warehouse Company wishes to apply the Miller-Orr model to manage its cash investment. They have determined that the cost of either investing in or selling marketable securities is $100. By looking at Book Warehouses past cash needs, they have determined that the variance of daily cash ows is $20,000. Book Warehouses opportunity cost of cash, per day, is estimated to be 0.03%. Based on experience, management has determined that the cash balance should never fall below $10,000. Calculate the lower limit, the return point, and the upper limit based on the Miller-Orr model of cash management.
Z = (3/4 * Transaction cost * Cash flow variance / i)^(1/3) Z = (3/4 * 100 * 20000 / .0003)^(1/3) = 1710 Lower limit = 10000 (Given) Upper limit = Lower

it + Z = 10000 + 1710 = 11710 Return point = Lower limit + Upper limit * 1/3 = 10000 + 11710 / 3 = 13903

ANSWER:

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