What is the opportunity cost of keeping a cash balance of $2.5 million, if the daily interest rate is 0.025 percent and the average transaction cost of investing money overnight is $50?

Question

Quizplus · Accepted Answer

The opportunity cost formula is: Opportunity cost = Potential return of the best option not chosen - Return of the chosen option
If we invest the $2.5 million overnight, we can earn an interest of:
$2,500,000 x 0.025% = $625
However, there is a transaction cost of $50.

So, the potential return of the best option not chosen is $625 - $50 = $575.
Therefore, the opportunity cost of keeping a cash balance of $2.5 million is $575.
The best choice would be to invest the money overnight to earn interest, as the opportunity cost of keeping a cash balance is higher.

What Is the Opportunity Cost of Keeping a Cash Balance