What Is the Opportunity Cost of Keeping a Cash Balance

question 30

Multiple Choice

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?

• A)$121
• B)$171
• C)$575
• D)$675 Daily interest = 2.5 million x .00025 = 625

---

Definitions:

Accrual Accounting

An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.

Proprietary Fund Types

Types of funds used by governmental entities to account for activities similar to those found in the private sector, where the intent is to recover costs through user charges.

Internal Service Funds

Funds used by a government entity to account for the services provided by one department to other departments on a cost-reimbursement basis.

Enterprise Funds

Governmental accounting funds used to account for operations financed and operated in a manner similar to private business enterprises, where the intent is that the costs are financed primarily through user charges.