Question

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?

Answer 1

Answer:

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.