9. Conduct a Miller-Orr analysis using the data in problems 6 but with a lower cash limit of $5,000.

a. What should the cash return level be, using the Miller-Orr model?

b. What is your estimate of the average cash balance if the Miller-Orr calculation is used to set the cash return level?

c. How do you explain your finding in part a to the assistant treasurer, who wants to know how to use the information provided by the model?

d. If the variance of daily net cash flows is $10,000,000 instead of $5,000,000, how does this change the answer determined in part a? Is the cash return level double your earlier result? How do you interpret this?

(IF NEEDED)

6. The assistant treasurer of Monroe Tires, Inc., is trying to .determine what the appropriate cash return level should be. The company's cash balances have been fluctuating wildly because of unpredictable and wide-ranging receipts and disbursements. The best estimate of annual disbursements is $5,000,000. The investment broker charges $75 per securities transaction. Short-term investment interest rates are 12 percent. The company does not mind a $0 cash balance but does not want the balance to be negative.

A. What should the cash return level be, according to the Baumol model?

b. What will the average cash balance be if the company's cash outflows fit the assumptions of the Baumol model?

c. How many security sales will Monroe have in a year, assuming the model's assumptions are valid?

d. What will the total period costs be for a year?

e. Do you recommend that Monroe use the Baumol model? Why or why not?