Posted on by Unite Mahaso
Advantages of Miller-Orr
The Miller-Orr model is useful in that it considers the interest rates, transaction costs, and variability of cash flows. Higher interest rates give a narrower spread, so less cash needs to be held before the return point and the upper limit is reached. Secondly, higher transaction costs increase the spread and therefore reduce the number of transactions. More variability cash flows allow a greater degree of freedom for cash levels.
The disadvantage of the Miller-Orr model
The model assumes that cash flows vary randomly and does not take into account the fact that some cash flows can be predicted accurately.
See Also
Managing Optimum Cash Balances