A man is buying a small garden tractor. There will be no maintenance cost during the first 2 years because the tractor is sold with 2 years free maintenance. For the third year, the maintenance is estimated at $80. In subsequent years the maintenance cost will increase by $40 per year. How much would need to be set aside now at 8% interest to pay the maintenance costs on the tractor for the first 6 years of ownership?
Answer:
Money need to be set aside = $ 386.63
Explanation to the above answer:
We have been given that
third year, the maintenance is estimated at $80.
subsequent years maintenance cost will increase by $40 per year.
8% interest.
Now we will find present value of the maintenance cost as follow
| Year | Maintenance | Pv Factor at 8% |
Prasent value |
| A | B | C= A*B | |
| 1 | 0 | 0.925926 | 0 |
| 2 | 0 | 0.857339 | 0 |
| 3 | 80 | 0.793832 | 63.50658 |
| 4 | 120 | 0.73503 | 88.20358 |
| 5 | 160 | 0.680583 | 108.8933 |
| 6 | 200 | 0.63017 | 126.0339 |
| 386.6374 |
present value of the maintenance cost= $ 386.63
