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21 April, 06:43

Lucky Louie's bank requires a minimum balance at all times of $1500 in order to provide free checking services. The bank pays .5% per annum interest on the minimum balance. If you do not maintain the balance, account service fees are $4 per month. Assuming Lucky can earn 2.5% on his money not sitting at the bank, what is his net benefit to maintaining the minimum balance?

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  1. 21 April, 10:30
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    Net benefit $18

    Explanation:

    Saivings from fees:

    $4 fee x 12 months = $ 48

    Interst 1,500 x 0.005 = $ 7.5

    Opportunity cost:

    1,500 x 0.025 = ($ 37.5)

    Net benefit: 18.00

    Fro mthe saving of fees and interest we should subtract the opprtunity cost, which represen the gain from putting the cash in the best interest alternative. This makes a more realistic approach than just the accounting gain.
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