Caluating opportunity cost. what is the annual opportunity cost of a checking account that requires a $500 minimum balance to avoid service charges? Assume an interest rate of 3 percent
15.00
what is the opportunity cost or a checking account that requires a $350.00 minimum balance to avoid service fees assume a interest rate of 3 percent
To calculate the annual opportunity cost of a checking account that requires a $500 minimum balance to avoid service charges, you need to consider the interest that could have been earned on the minimum balance.
Step 1: Calculate the interest earned on the minimum balance:
Interest earned = Minimum balance * Interest rate
Interest earned = $500 * 0.03 = $15
Step 2: Calculate the annual opportunity cost:
Annual opportunity cost = Service charges - Interest earned
Assuming there are no service charges, the annual opportunity cost would be:
Annual opportunity cost = $0 - $15 = -$15
Therefore, the annual opportunity cost of the checking account would be -$15, indicating that you would have lost $15 in potential interest earnings by keeping the minimum balance in the account.
To calculate the annual opportunity cost of a checking account that requires a $500 minimum balance to avoid service charges, you need to consider the interest you could have earned on that $500 if it was invested elsewhere.
Here's how you can calculate the annual opportunity cost:
1. Determine the interest rate: In this case, the interest rate is given as 3 percent.
2. Calculate the interest earned: Multiply the minimum balance ($500) by the interest rate (3 percent or 0.03). The result is $500 * 0.03 = $15.
3. Convert the annual interest to a yearly percentage: Divide the interest earned ($15) by the minimum balance ($500), and then multiply by 100 to get the percentage. The calculation is ($15/$500) * 100 = 3 percent.
Therefore, the annual opportunity cost of this checking account is 3 percent. This means that by keeping the $500 in this account instead of investing it elsewhere with a 3 percent return, you are missing out on potential earnings of $15 per year.