Question

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?

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