Question

My son bought a used car and wants to set aside money for maintenance costs. The maintenance cost is projected to be $150 in the first year with an annual increase of $50 each year after the first year. Assuming an interest rate of 5 percent, how much money must he set aside now to keep the car running for 10 years?

Answer #1

Rate of interest = 5%

Maintenance cost for $150 for first year and $50 rising every year.

Present value of all cash flow will be the amount your son have to save for maintenance because the money kept idle in bank will earn rate of interest and raise its value when you withdraw it.

Present value is calculated as: [Cash Flow / (1 + Rate of Interest)Year]

Year |
Cash Flow |
Present Value |

1 | 150 | 142.86 |

2 | 200 | 181.41 |

3 | 250 | 215.96 |

4 | 300 | 246.81 |

5 | 350 | 274.23 |

6 | 400 | 298.49 |

7 | 450 | 319.81 |

8 | 500 | 338.42 |

9 | 550 | 354.53 |

10 | 600 | 368.35 |

2,740.86 |

Your son should keep 2,740.86 for the running cost of car for 10 years.

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