Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day. Your total cost of holding cash is (182.50/T) + (3.75 ×T).
a.What is your cost of going to the ATM? b.What is the nominal interest rate? c.How often will you go to the ATM to minimize your costs?
What will be an ideal response?
a.The cost of going to the ATM is $0.50. b.The nominal interest rate is 10 percent. c.The total cost is minimized when T = 7.
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