What would be the net annual cost of the following checking accounts?

a. Monthly fee, $4.25; processing fee, 50 cents per check; assume checks written average to 16 per month.

b. Interest earnings of 5 percent with a $500 minimum balance; average monthly balance, $8000; monthly service charge of $12 for falling below the minimum balance, which occurs five times a year (no interest earned in these months).

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TomShelby TomShelby · Answer 1 · 2019-09-17T20:10:36+02:00

Answer:

Option B is the better as it generates cash for 173 dollars rather than generating a cost $12.25

Explanation:

option A

monthly fee: 4.25

50 cent per check

total cost: 0.50x + 4.25

if 16 check are written per month:

0.50 (16) + 4.25 = 8 + 4.25 = 12.25

option b

the year has 12 months, during five months we will pay the service charge:

$12 x 5 month = $60

during the other 7 months, we accrued (earn) interest:

8,000 x 7 months x 5%

8,000 x 7/12 x 5% = 233,33

We receive 233 interest - 60 serive charge: 173 dollars

Option B is the better as it generates cash for 173 dollars rather than generating a cost $12.25