Question

2) Jay’s Electronics is expecting his maintenance cost for his building to be $10,000 per year starting 2 years from now, decreasing $1000 per year for the 4 years thereafter. For example, in year 3 his maintenance costs will be $9000. How much does Jay need in his bank account now to be able to pay the maintenance costs for the next five years? Assume Jay can earn an interest rate is 10% per year on his money.

Show your work

Draw a cash flow diagram for each problem.

Write out all formulas

Answer 1

Answer:

Assume that Jay can earn an interest rate is 10% per year on his money.

Year	Maintenance cost($)	Present value of Maintenance cost($)
2	10000	10000*(P/F,10%,2)=10000*0.8264=8,265
3	9000	9000*(P/F,10%,3)=9000*0.7513=6762
4	8000	8000*(P/F,10%,4)=8000*0.6830=5465
5	7000	7000*(P/F,10%,5)=7000*0.6209=4346
Total		24838

Jay should have $24,838 in his bank account now to be able to pay the maintenance costs for next 5 years.

Cash flow diagram will be as follows:

For calculating present value following formula can also be used:

Maintenance cost/(1+interest rate)ⁿ; n is year in which maintenance cost is incurred.