Question

Veggie Burgers, Inc., would like to maintain its cash account at a minimum level of $250,000 but expects the standard deviation in net daily cash flows to be $12,500, the effective annual rate on marketable securities to be 5.2 percent per year, and the trading cost per sale or purchase of marketable securities to be $30.00 per transaction

What will be its optimal cash return point? (Use 365 days a year. Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Optimal Cash return point (as per Miller - Orr)

=( ((3 * Cost per transaction * variance of daily cash flow) / (4 * rate of return on marketable securities per day)) raise to the power of 1/3 ) + Lower Limit control

Now Variance of daily cash flow = (Standard Deviation of daily cash flows)²

= ($12500)²

= $ 156250000

Rate of return om marketable securities per day = 0.052 / 365 = 0.00014246575

Cost per transaction = $30

Lower Limit Control = $250000

Therefore optimal cash return point = ((( 3 * 30 * 156250000) / (4 * 0.00014246575))raise to the power 1/3 ) + $250000

=( ( 14062500000)^1/3 / (0.000569863)^1/3 )+ $ 250000

= (2413.72346151 / 0.0829068001) + $ 250000

= $ 29113.70 + $ 250000

= $ 279113.70