Question

2. Mr. Deere just purchased a new riding lawn mower for $550. The first year maintenance is free. His maintenance costs are estimated to be $15 the second year and increase by $15 each year thereafter. At 8% interest calculate how much money should be set aside when he buys the mower to pay for maintenance for the next 10 years.

Answer 1

present value factor = 1/(1+r)^n

here,

r=8%

=>0.08.

n=1,2,3,4,5,6,7,8,9,10.

year	cash flow	present value factor	cash flow * present value factor
1	0	1/(1.08)^1=>0.92593	0
2	15	1/(1.08)^2=>0.85734	12.8601
3	15+15=30	1/(1.08)^3=>0.79383	23.8149
4	30+15=45	1/(1.08)^4=>0.73503	33.07635
5	45+15=>60	1/(1.08)^5=0.68058	40.8348
6	60+15=75	1/(1.08)^6=>0.63017	47.26275
7	75+15=90	1/(1.08)^7=0.58349	52.5141
8	90+15=>105	1/(1.08)^8=>0.54027	56.72835
9	105+15=>120	1/(1.08)^9=>0.50025	60.03
10	120+15=>135	1/(1.08)^10=>0.46319	62.53065
		Amount to be set aside	389.65