Question

In: Accounting

Leon Bowie is trying to determine the amount to set aside so that he will have...

Leon 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, Leon has developed the following estimates.

Engine Overhaul
Estimated Cash Outflow

Probability
Assessment
$320 10%
450 30%
710 50%
840 10%




Click here to view factor tables

How much should Leon Bowie deposit today in an account earning 8%, compounded annually, so that he will have enough money on hand in 5 years to pay for the overhaul?

Solutions

Expert Solution

Answer

Estimated Cash Outflow

Probability

Cash Flow

                                        320.00

10%

             32.00

                                        450.00

30%

          135.00

                                        710.00

50%

          355.00

                                        840.00

10%

             84.00

                                   

Total

          606.00

Future Value = $606

Cost of Capital (i) = 8%

Time (n) = 5 Years

Present Value = FV * {1 / (1 + i)^n}

= $606 * (1 / (1 + 0.08)^5}

= $606 * (1 / 1.4693280768)

= $606 * 0.680532

= $412.4

Leon needs to invest $412.4 today to get enough money in 5 years.

Dear Student, if u have any query, plz feel free to reach me.

ekkarill92 answered 3 years ago
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