Question

The Blue Moon Hotel and Spa spends GHS 359,000 a week to pay bills and maintains a lower cash balance limit of GHS 250,000. The standard deviation of the disbursements is GHS 46,800. The applicable weekly interest rate is 0.045 percent and the fixed cost of transferring funds is GHS 60. What is the hotel's optimal upper cash limit based on the Miller-Orr model?

Answer 1

Solution:-

To Calculate Cash Balance Target-

Cash Balance Target =

Cash Balance Target =

Cash Balance Target = 2,50,000 + 59,416.29

Cash Balance Target = GHS 3,09,416.29

To Calculate Upper Cash Limit-

Upper Cash Limit = 3 * Cash Balance Target - 2 * Cash Balance Limit

Upper Cash Limit = 3 * 3,09,416.29 - 2 * 2,50,000

Upper Cash Limit = GHS 4,28,248.87

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