I am not sure how to solve this problem. Could someone please help and explain the proper steps.
Determine the annual net cost if the
Annual interest of 2.5% is paid if the balance exceeds $750, $8 monthly fee if the account falls below minimum balance $815, account falls below $750 during 4 months
To determine the annual net cost, we need to calculate the total cost for each component and then subtract any potential interest earned.
1. Calculate the total cost of the monthly fees: Since there is an $8 monthly fee for falling below the minimum balance of $815, we need to determine how many months the account falls below $750. From the problem, it states that the account falls below $750 during 4 months. So, the total cost of monthly fees would be 4 months multiplied by $8, which equals $32.
2. Calculate the interest earned: If the balance exceeds $750, an annual interest rate of 2.5% is paid. To calculate the interest earned, we need to find the average daily balance for the year by considering when the balance exceeds $750 and when it falls below.
To simplify the calculations, let's assume there are two scenarios:
a) Months when the balance is above $750 (8 months in total)
b) Months when the balance is below $750 (4 months in total).
a) When the balance is above $750:
- Assume the balance during these months is $800.
- Calculate the average daily balance for these months: ($800 x 8 months) / 12 months = $533.33 (approximately)
b) When the balance is below $750:
- Assume the balance during these months is $700.
- Calculate the average daily balance for these months: ($700 x 4 months) / 12 months = $233.33 (approximately)
Now, we can calculate the interest earned.
- For the balance above $750 with an average daily balance of $533.33, the interest earned would be: ($533.33 x 2.5%) = $13.33 (approximately).
- There is no interest earned for the months when the balance falls below $750.
3. Calculate the net cost: To calculate the net cost, subtract the interest earned from the total cost of the monthly fees.
- Total cost of monthly fees: $32
- Interest earned: $13.33
- Net cost: $32 - $13.33 = $18.67
Therefore, the annual net cost would be approximately $18.67.