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

Question

Quizplus · Accepted Answer

The opportunity cost of keeping a cash balance is equal to the interest that could have been earned if the money was invested instead of being idle.

The daily interest on $2.5 million at a rate of 0.025% is:

$2.5 million x 0.00025 = $625

The transaction cost of investing money overnight is $50. Therefore, the net daily interest that could be earned by investing money overnight is:

$625 - $50 = $575

So, the opportunity cost of keeping a cash balance of $2.5 million is $575 per day.

Therefore, the best choice is C.

What Is the Opportunity Cost of Keeping a Cash Balance