Keep the change is a clever way of encouraging savings

Reference no: EM13692883

Keep the Change is a clever way of encouraging savings that builds a savings account with a contribution margin of 2 percentage points of interest: It pays one percent on a savings account that can be invested in three percent, no-risk government paper, but will probably return more in its use by the bank management. Another way to say this is that the spread between the cost of the savings account and earnings from it is two percent. Let us say Bank of America spent an average of $200 per new savings account in this Keep the Change promotion. Bank of America shareholder required rate of return (RRR) is 20 percent. Assume a retention rate of 80 percent a year. What must the average balance in the Keep the Change savings account be over 10 years to have this campaign create shareholder value?

Reference no: EM13692883

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