Question

You are considering the purchase of a brand new Mercedes car but are worried about the maintenance cost of the car relative to other cars. You plan to keep the car for 10 years and have done some online research that seems to indicate that the cost of maintain the car will be $500 in the first year and increase on average by 5% per year. If you wanted to have a fund that would cover the maintenance costs, how much money will you need to deposit in the fund today to cover the maintenance costs for the next 10 years. Assume your fund earns 7% interest. <include a cash flow diagram>

Answer 1

ANSWER:

All the calculations have been done in excel as the diagram couldn't be uploaded due to some technical problem.

year	0	1	2	3	4	5	6	7	8	9	10
maintenance cost		500	525	551.25	578.8125	607.7531	638.1408	670.0478	703.5502	738.7277	775.6641
present worth	$4,298.81

in excel we will use the npv function.

=npv(rate,cash flow from year 1 to year 10)

=npv(7%,500,525,551.25,578.8125,607.7531,638.1408,670.0478,703.5502,738.7277,775.6641)

=4,298.81

so the fund that needs to cover the maintenance costs is $4,298.81