Question

The Moller SkycarM400 is a flying car known as a personal air vehicle (PAV) that is expected to be FAA certified by December 31, 2110. The cost is $985,000, and a $100,000 deposit will hold one of the first 100 ‘cars’. Assume a buyer pays the $885,000 balance 3 years after making the $100,000 deposit. At an interest rate of 10% per year, what is the effective total cost of the PAV in year 3? Provide a cash flow diagram.

Answer 1

Following is the required cash flow diagram -

Deposit made at year 0 = $100,000

Amount paid at Year 3 = $885,000

Interest rate = 10%

Time period = 3 years

Calculate the effective total cost (F) of the PAV in Year 3 -

F = Deposit made at year 0(F/P, i, n) + Amount paid at Year 3

F = $100,000(F/P, 10%, 3) + $885,000

F = ($100,000 * 1.3310) + $885,000

F = $133,100 + $885,000

F = $1,018,100

The effective cost of the PAV in year 3 is $1,018,100.