Andrew has purchased a new car He wishes to set aside enough

Andrew has purchased a new car. He wishes to set aside enough money in a bank account to pay the maintenance for the first 5 years. It has been estimated that the maintenance cost of a car is as follows: Year Maintenance Cost $120 $150 $180 $210 $240 2 4 Assume the maintenance costs occur at the end of each year and that the bank pays 5% interest. How much should Andrew deposit in the bank now?

Solution

This is the calculation of present value (PV) by the discount rate of 5%.

Year

Cost = C

5% factors (F) = 1/(1 + 0.05)^n [where n = number of years]

C × F

1

120

0.95238

114.29

2

150

0.90702

136.05

3

180

0.86383

155.49

4

210

0.82270

172.77

5

240

0.78352

188.04

PV

766.64

Answer: The deposited amount should be $766.64.

Year	Cost = C	5% factors (F) = 1/(1 + 0.05)^n [where n = number of years]	C × F
1	120	0.95238	114.29
2	150	0.90702	136.05
3	180	0.86383	155.49
4	210	0.82270	172.77
5	240	0.78352	188.04
PV			766.64