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

Under the Miller-Orr model, the spread between the upper and lower cash limits is given by 3 × [(3/4 × transaction cost × variance of daily cash flows) ÷ daily interest rate]^(1/3). If this spread is ₹30,000 and the lower limit is ₹10,000, the upper limit and return point (return point = lower limit + spread/3) are respectively:

The upper limit is lower limit plus spread, so ₹10,000 + ₹30,000 = ₹40,000. The return point is lower limit plus one-third of the spread, so ₹10,000 + ₹10,000 = ₹20,000. Hence ₹40,000 and ₹20,000 are the correct figures.

  1. A₹40,000 and ₹20,000Correct
  2. B₹40,000 and ₹25,000
  3. C₹30,000 and ₹20,000
  4. D₹40,000 and ₹13,333

Explanation

Upper limit = lower limit + spread = 10,000 + 30,000 = ₹40,000. Return point = 10,000 + 30,000/3 = ₹20,000. Using spread/2 would give ₹25,000, which is wrong because the formula uses one-third.

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