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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Business

Karson Singleton

21 March, 07:49

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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Jon Herman · Answer 1

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.