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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 x [(3/4 x transaction cost x variance of daily cash flows) / interest rate per day]^(1/3). If the lower limit is Rs 20,000, the spread is Rs 60,000, then the upper limit and the return point (lower + spread/3) are respectively:

The upper limit is the lower limit plus the spread, which is Rs 80,000. The return point is the lower limit plus one-third of the spread, which is Rs 40,000. So the correct pair is Rs 80,000 and Rs 40,000.

  1. ARs 80,000 and Rs 40,000Correct
  2. BRs 80,000 and Rs 60,000
  3. CRs 60,000 and Rs 40,000
  4. DRs 1,00,000 and Rs 40,000

Explanation

Upper limit = lower limit + spread = 20,000 + 60,000 = Rs 80,000. Return point = lower limit + spread/3 = 20,000 + 20,000 = Rs 40,000. Option B wrongly adds half the spread; option C forgets the lower limit in the upper limit.

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