MD Groceries currently sets its initial cash balance at $5,000, which is depleted every four days. The current market rate of return is 4.5% per year. The firm pays $2.50 each time it replenishes its cash account. Use a 360-day year. What are the opportunity costs for MD's decision regarding its cash balance?

A) $50.00 per year
B) $65.00 per year
C) $100.00 per year
D) $112.50 per year
E) $225.00 per year

The opportunity cost of holding cash is calculated by considering the interest forgone on the cash balance. The formula for the opportunity cost is: (Average Cash Balance * Market Rate of Return) + (Transaction Cost * Number of Transactions per Year). The average cash balance is $5,000/2 = $2,500 (since cash is depleted from $5,000 to $0 every four days, the average is half of $5,000). The market rate of return is 4.5% per year. The transaction cost is $2.50 each time cash is replenished. The number of transactions per year is 360 days / 4 days = 90 times. Therefore, the opportunity cost is ($2,500 * 4.5%) + ($2.50 * 90) = $112.50 + $225 = $337.50. However, since the calculation mistake led to an incorrect total, the correct approach should focus solely on the components given: Opportunity cost from interest = $2,500 * 0.045 = $112.50. The transaction cost component was incorrectly added to the total instead of focusing on the interest opportunity cost alone, which matches option D.