Question

1. Future Value on Cost of Extended Warranty. Allison Jones of Flagstaff, Arizona, is considering paying $400 a year for an extended warranty on several of her major appliances. If the appliances are expected to last for five years and she can earn 2 percent on her savings, what would be the future value of the amount she will pay for the extended warranty?

Answer 1

Let us assume that the first Payment will occur at the end of year 1,

So we can use the Future Value Annuity factor to solve the issue.

The Formula for FV Annuity = (((1+i)^ⁿ)-1) / (i),

Where as i = interest rate or opportunity interest cost, which is 2% or 0.02,

n = number of periods = 5yrs or 5,

So the equation after substituting values = (((1.02)⁵)-1)/0.02,

= 0.1040808032 / 0.02 = 5.20404016,

The Future Value after 5 yrs = 5.20404016 * $400,

= $2,081.616064, rounded to 2 decimal = $2,081.62,

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