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

Under the Miller-Orr model, if the lower control limit is Rs 20,000, the spread between upper and lower limits is Rs 30,000, then what are the return point and the upper limit respectively?

The return point is Rs 30,000 and the upper limit is Rs 50,000. Upper limit is lower limit plus spread, and return point is lower limit plus one third of the spread.

  1. ARs 30,000 and Rs 50,000
  2. BRs 40,000 and Rs 50,000Correct
  3. CRs 30,000 and Rs 60,000
  4. DRs 40,000 and Rs 60,000

Explanation

Upper limit = lower limit + spread = 20,000 + 30,000 = Rs 50,000. Return point = lower limit + spread/3 = 20,000 + 10,000 = Rs 30,000. Note this gives Rs 30,000, so the matching pair is Rs 30,000 and Rs 50,000.

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