Question

You own a small contracting company and are buying a new skid steer loader. There will be no maintenance costs for the loader for the first two years because it comes with two years' free maintenance. After that, you expect the maintenance will cost $5500 per year.
How much would have to be set aside now at 6% interest to pay to maintain the skid steer for the first six years that you own it?

Answer 1

Expected maintenance cost per year =$5500

Total maintenance cost in 6 years = 5500×4= $22000 ( multiplied by 4 as two years maintenance is free)

Maintenance cost per year = 22000÷6 = $3666.67

Rate of interest = 6%

How much would have to be set aside now at 6% interest to pay to maintain the skid steer for the first six years that you own it?

Let the money to be set aside be 'X' to receive interest of $3666.67 per year to cover the maintenance cost.

6% of x = 3666.67

X = 3666.67×100÷6

X= 61111.1667

If $61111.1667 is set aside then the interest on it per year will be 3666.67 approximately. Interest generated in 6 years will be 22000.02 approximately.