Question

My son bought a used car and wants to set aside money for maintenance costs. The...

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?

Homework Answers

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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