Question

Chris Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 5 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 5 years, by conducting some research online, Chris has developed the following estimates.

Engine Overhaul Estimated Cash Outflow Probability Assessment
$300 10%
470 30%
740 50%
880 10%

How much รhould Chris Bowie deposit today in an account earning 6%, compounded annually, so that he will have enough money on hand in 3 years to pay for the overhaul?

Answer 1

Answer:

$515.53

Explanation:

CALCULATION OF THE ESTIMATED CASH OUTFLOW EXPENSES FOR ENGINE OVERHAUL

Engine Overhaul                          Probability                 Estimated Cash

estimated cash outflow(X)                 (Y)                           flow ( X * Y)

$370                                             10%                                $37

$470                                             30%                               $141

$720                                             50%                               $360

$760                                             10%                                $76

$2320                                                                                 $614

Present Value Factor, PVF, of 3 years and 6% = 0.839619(from the table)

hence, value = $614 x 0.839619

                     = $515.53

Amount Deposited = $516 (approx)