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 cost of keeping a cash balance of $2.5 million is the opportunity cost of not investing that money and earning interest on it.

The daily interest earned on $2.5 million is $625 (2.5 million x 0.025%).

If the average transaction cost of investing money overnight is $50, then the opportunity cost of keeping the cash balance for one day is $625 - $50 = $575.

Therefore, the best choice is C.

What Is the Opportunity Cost of Keeping a Cash Balance