The standard deviation in daily cash balance is Rs 1,60,000 Interest on marketable securities is 10 p

The Miller-Orr model is used for setting the target cash balance. If the cash balance reaches the upper limit, an amount must be invested in marketable securities or placed in a deposit account, sufficient to reduce the balance back to the return point. Again, this is calculated by the model as the distance between the upper limit and the return point. The minimum cost upper limit is calculated by reference to brokerage costs, holding costs and the variance of cash flows.

Spread = 3* [3/4 * Transaction cost * variance of cash flows / interest rate]^1/3

Variance and interest rates should be expressed in daily terms

Given information: transaction cost = 100/-

standard deviation = 1,60,000/- daily

interest rate 10% p.a. convert into daily basis i.e., 0.00027 rounded off to 0.0003

lower limit = 16,000

substitute the above values in the above formula to find out the spread

spread = 3[3/4*100*(1,60,000)²/0.0003]^1/3= 5,56,990.66

Thus the Upper limit of cash balance = 16000+5,56,990.66

= 5,72,990.66/-