In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 90,000 British pounds, equivalent at the time to about $180,000. Both the Ferrari and the money, in 100 pound notes, were on display. If the U. K. interest rate was 5% per year, and the dollar interest rate was 2% per year (EARs), how much did it cost the company in dollars each month to keep the cash on display? That is, what was the opportunity cost of keeping it on display rather than in a bank account? (Ignore taxes.)

Question

Business

Amiyah Moon

19 June, 21:19

In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 90,000 British pounds, equivalent at the time to about $180,000. Both the Ferrari and the money, in 100 pound notes, were on display. If the U. K. interest rate was 5% per year, and the dollar interest rate was 2% per year (EARs), how much did it cost the company in dollars each month to keep the cash on display? That is, what was the opportunity cost of keeping it on display rather than in a bank account? (Ignore taxes.)

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Answers (1)

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Andy Cooke · Answer 1

The cost for the company is 375 pounds.

Explanation:

In order to calculate how much did it cost the company in dollars each month to keep the cash on display we would have to make the following calculations:

Current exchanage rate between Pound and dollar = $180,000 / 90,000 pound

= $2 per pound.

Total amount in Display = $180,000

Interest rate in USA = 2%

Monthly cost = $180,000 * 2% / 12

= $3300

Monthly opportunity cost of keeping it on display rather than in a bank account is $300.

Monthly Cost in term of pound = 90,000 * 5% / 12

= 375 Pound.

Monthly cost in term of pound is 375 pound.