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 $9000. How much does Jay need in his bank account now to be able to pay the maintenance costs for the next five years? Assume Jay can earn an interest rate is 10% per year on his money.
Show your work
Draw a cash flow diagram for each problem.
Write out all formulas
Assume that Jay can earn an interest rate is 10% per year on his money.
|Year||Maintenance cost($)||Present value of Maintenance cost($)|
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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