Question

# 2) Jay’s Electronics is expecting his maintenance cost for his building to be \$10,000 per year...

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.

Draw a cash flow diagram for each problem.

Write out all formulas

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.

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