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CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Dhruv Pharma uses the Miller-Orr model. Minimum cash balance is Rs 20,000, the spread between the upper and lower limits is computed as Rs 36,000. Using the standard model, what are the upper limit and the return point?

The upper limit is Rs 56,000 and the return point is Rs 32,000. The upper limit is the lower limit plus the spread, while the Miller-Orr return point is the lower limit plus one-third of the spread, giving 20,000 plus 12,000.

  1. AUpper limit Rs 56,000; return point Rs 32,000Correct
  2. BUpper limit Rs 56,000; return point Rs 38,000
  3. CUpper limit Rs 56,000; return point Rs 44,000
  4. DUpper limit Rs 44,000; return point Rs 32,000

Explanation

Upper limit = lower limit + spread = 20,000 + 36,000 = Rs 56,000. Return point = lower limit + spread/3 = 20,000 + 12,000 = Rs 32,000. Rs 44,000 comes from adding two-thirds of the spread, which is wrong. Rs 38,000 comes from adding half the spread.

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