Question

Bowie is trying to determine the amount to set aside so that he will have enough...

Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 6 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 6 years, by conducting some research online, Newman has developed the following estimates.

Engine Overhaul Estimated Cash flow probability assessment
$380 10%
450 30%
810 50%
800 10%

How much should Bowie deposit today in an account earning 6%, compounded annually, so that he will have enough money on hand in 6 years to pay for the overhaul? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Homework Answers

Answer #1
Expected cash flow
Expected cash flow = ($380 x 0.10) + ($450 x 0.30) + ($810 x 0.50) + ($800 x 0.10)
Expected cash flow = $38 + $135 + $405 + $80
Expected cash flow = $658
Amount to be deposited
Amount to be deposited = Expected cash flow / (1 + r)^n
Amount to be deposited = $658 / (1 + 0.06)^6
Amount to be deposited = $658 / 1.418519112
Amount to be deposited = $463.86
Therefore, the amount to be deposited will be $463.86
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