Discuss the sensitivity of the model to changes in the value of the input variables.
PRS Corporation uses one of the cash conversion models to manage its cash account. Recently, someone asking how sensitive is the solution for the return point and upper limit to changes in the conversion cost, the variance of daily net
i) Compute the return point using current values.
ii) Compute the upper limit using current values
iii) Simultaneously increase each of the three (3) variables values used by 50% and recalculate the return point and upper limit.
iv) Discuss the sensitivity of the model to changes in the value of the input variables.
NB. i, ii and iii have been answered already. Please answer question iv.
Miller-Orr Model:
Miller-Orr Mode; is used to find out the optimum cash balance level which subsequently reduces the cash management cost. The basic assumptions are the cash flows which are uncertain and have an upper limit and return point.
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