Question

ony Bowie is trying to determine the amount to set aside so that he will have enough money on hand in 4 years to overhaul the engine on his vintage used car. While there is some uncertainty about the cost of engine overhauls in 4 years, by conducting some research online, Tony has developed the following estimates. Engine Overhaul Estimated Cash Outflow Probability Assessment $330 10% 460 30% 750 50% 950 10% Click here to view factor tables How much should Tony Bowie deposit today in an account earning 9%, compounded annually, so that he will have enough money on hand in 4 years to pay for the overhaul

Answer 1

Tony should deposit $454.10 today so that he can have $641 in 4 years

Step-by-step explanation:

first we must determine the expected value of the repairs = ($330 x 0.1) + ($460 x 0.3) + ($750 x 0.5) + ($950 x 0.1) = $641

so now we have our future value

present value = future value / (1 + 9%)⁴ = $641 / 1.41158 = $454.10

Tony should deposit $454.10 today so that he can have $641 in 4 years