Question

Leon Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 3 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 3 years, by conducting some research online, Leon has developed the following estimates.

Engine Overhaul Estimated Cash Outflow			Probability Assessment
$360			10%
550			30%
800			50%
720			10%

Click here to view factor tables

How much should Leon 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? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)

Deposit amount

$ enter the deposit amount in dollars rounded to 0 decimal places

Answer 1

ANSWER

Estimated Cash Outflow	Probability	Cash Flow
360.00	10%	36.00
550.00	30%	165.00
800.00	50%	400.00
720.00	10%	72.00
	Total	673.00

Future Value = $673

Cost of Capital (i) = 6%

Time (n) = 3 Years

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

= $673 * (1 / (1 + 0.06)^3}

= $673 * (1 / 1.191016)

= $673 * 0.83962

= $565.06

Leon needs to invest $565 today to get enough money in 3 years.

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