Question

In the summer of​ 2008, at Heathrow airport in​ London, Bestofthebest​ (BB), a private​ company, offered a lottery to win a Ferrari or 90,000 British​ pounds, equivalent at the time to about $180,000. Both the Ferrari and the​ money, in 100 pound​ notes, were on display. If the U.K. interest rate was 5% per​ year, and the dollar interest rate was 2% per year​ (EARs), how much did it cost the company in dollars each month to keep the cash on​ display? That​ is, what was the opportunity cost of keeping it on display rather than in a bank​ account? (Ignore​ taxes.)

Answer 1

Answer:

The cost for the company is 375 pounds.

Explanation:

In order to calculate how much did it cost the company in dollars each month to keep the cash on​ display we would have to make the following calculations:

Current exchanage rate between Pound and dollar = $180,000 / 90,000 pound

= $2 per pound.

Total amount in Display = $180,000

Interest rate in USA = 2%

Monthly cost = $180,000 × 2% / 12

= $3300

Monthly  opportunity cost of keeping it on display rather than in a bank​ account is $300.

Monthly Cost in term of pound = 90,000 × 5% / 12

= 375 Pound.

Monthly cost in term of pound is 375 pound.