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Chapter 6: Q21E (page 305)

Keith Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 2 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 2 years, by conducting some research online, Keith has developed the following estimates. Engine Overhaul Probability Estimated Cash Outflow Assessment $200 10% 450 30% 600 50% 750 10%

Instructions How much should Keith Bowie deposit today in an account earning 6%, compounded annually, so that he will have enough money on hand in 2 years to pay for the overhaul?

Short Answer

Expert verified

The present value of the expected cash flow will be $471.7.

Step by step solution

01

Computation expected cash flow

ExpectedCashFlow=Cashflow×Probability=200×10%+450×30%+600×50%+750×10%=20+135+300+75=$530

02

Computation of present value

PresentValue=ExpectedCashflow×PVFactor=530×0.89000=$471.7

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Most popular questions from this chapter

Assuming the same facts as those in E6-18 except that the payments must begin now and be made on the first day of each of the 15 years, what payment method would you recommend?

During the past year, Stacy McGill planted a new vineyard on 150 acres of land that she leases for \(30,000 a year. She has asked you, as her accountant, to assist her in determining the value of her vineyard operation.

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