The correct answer is D. Total annual requirement of cash.
The Miller-Orr model is a cash management model that helps businesses determine the optimal level of cash to hold. The model takes into account the variability in cash requirements, the cost of transactions, and the holding cost of cash. The model does not take into account the total annual requirement of cash because this is not a relevant factor in determining the optimal level of cash to hold.
The Miller-Orr model is a simple and effective way to manage cash. The model is based on the following assumptions:
- Cash flows are random.
- The cost of carrying cash is constant.
- The cost of a transaction is constant.
- The desired level of cash is constant.
The model works by setting two levels for cash: a target level and a lower limit. The target level is the desired level of cash to hold. The lower limit is the minimum level of cash that the business should not fall below. When the cash balance falls below the lower limit, the business will make a purchase of cash. When the cash balance reaches the target level, the business will sell some of its cash.
The Miller-Orr model is a useful tool for businesses that want to manage their cash effectively. The model is simple to use and can be customized to meet the specific needs of the business.
Here is a brief explanation of each option:
- Option A: Variability in cash requirement. This is a factor that is considered by the Miller-Orr model. The model takes into account the variability in cash requirements to determine the optimal level of cash to hold.
- Option B: Cost of transaction. This is a factor that is considered by the Miller-Orr model. The model takes into account the cost of transactions to determine the optimal level of cash to hold.
- Option C: Holding cost. This is a factor that is considered by the Miller-Orr model. The model takes into account the holding cost of cash to determine the optimal level of cash to hold.
- Option D: Total annual requirement of cash. This is not a factor that is considered by the Miller-Orr model. The model does not take into account the total annual requirement of cash because this is not a relevant factor in determining the optimal level of cash to hold.