Question

How to solve this? The following table consists of cash flow data for a selected ten...

How to solve this?

The following table consists of cash flow data for a selected ten days.

Day

Receipts

Disbursements

1

60

70

2

90

50

3

80

90

4

90

120

5

110

140

6

60

50

7

60

40

8

120

110

9

80

100

10

110

80

  1. Calculate the variance of net daily cash flows.
  2. Assuming a lower limit of $300, a transaction cost of $10, and an annual interest rate of 9 percent, what is the upper limit and what is the return point using the Miller-Orr model?

Homework Answers

Answer #1

Solution:

Day Receipts Disbursements Net Cashflows Net Cashflows (Net Cashflow-Mean)^2 (Net Cashflow-Mean)^2
1 60 70 60-70 -10 (-10-1)^2 121
2 90 50 50-90 40 (40-1)^2 1521
3 80 90 90-80 -10 (-10-1)^2 121
4 90 120 120-90 -30 (-30-1)^2 961
5 110 140 140-110 -30 (-30-1)^2 961
6 60 50 50-60 10 (10-1)^2 81
7 60 40 40-60 20 (20-1)^2 361
8 120 110 110-120 10 (10-1)^2 81
9 80 100 80-100 -20 (-20-1)^2 441
10 110 80 110-80 30 (30-1)^2 841
Mean = Sum of net Cashflows/10 = 10/10 Variance = [Sum of(Net cashflow-mean)]/10
Mean = 1 Variance = 549
variance of net daily cash flows = 549
Lower Limit 300
Transaction Cost 10
Annual Interest Rate 9%
Spread = 3*[(3*transaction cost*Variance of net cashflows)/(4*(interest rate/365))]^(1/3) = 3*[(3*10*549)/(4*(0.09/365))]^(1/3) 766.80
Upper limit using the Miller-Orr model= Lower Limit + Spread = 300+766.80= 1066.80
Return Point using the Miller-Orr model= Lower Limit + 1/3 × Spread= 300+((1/3)*(766.80))= 555.60

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