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ACCA Applied Skills · Financial Management · Management of inventories, accounts receivable, accounts payable and cash

Bramwell Ltd has a cash management policy under which it holds a minimum cash balance of $10,000. The variance of daily cash flows is $4,000,000 and the transaction cost of each transfer between cash and investments is $50. The daily interest rate on investments is 0.02%. Using the Miller-Orr model, what is the spread between the upper and lower cash limits (to the nearest $100)? Spread = 3 x [(3/4 x transaction cost x variance) / interest rate]^(1/3).

This item does not reconcile with its options, so it should not be used as written.

  1. A$9,700
  2. B$19,100
  3. C$28,700Correct
  4. D$57,300

Explanation

Compute 3/4 x 50 x 4,000,000 = 150,000,000. Divide by 0.0002 = 750,000,000,000. The cube root is about 9,085, and multiplying by 3 gives about 27,256. Rounded to the nearest $100 this is $27,300, which is not listed, so the data does not reconcile; the nearest option is $28,700.

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