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Zero-balance account

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14.16 Zero-balance account Union Company is considering establishment of a zerobalance account. The firm currently maintains an average balance of $420,000 in
its disbursement account. As compensation to the bank for maintaining the zerobalance
account, the firm will have to pay a monthly fee of $1,000 and maintain a $300,000 nonâ?"interest-earning deposit in the bank. The firm currently has no other deposits in the bank. Evaluate the proposed zero-balance account, and make a recommendation to the firm, assuming that it has a 12% opportunity cost.

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Solution Preview

In order to decide we compare the cost of two alternatives

As of now, the firm maintains an average balance of $420,000 and does not earn any interest on it. ...

Solution Summary

The solution explains how to evaluate a Zero-balance account