A man is buying a small garden tractor. There will be no maintenance cost during the first 2 years because the tractor is sold with 2 years free maintenance. For the third year, the maintenance is estimated at $80. In subsequent years the maintenance cost will increase by $40 per year. How Much Would need to be set aside now at 8% interest to pay the maintenance costs on the tractor for the first 6 years of ownership

$386.64

Explanation:

We are to find the present value of the maintenance cost

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 and 2 = 0

Cash flow in year 3 = $80

Cash flow in year 4 = $80 + 40 = $120

Cash flow in year 5 = $120 + $40 = $160

Cash flow in year 6 = $160 + $40 = $200

I = 8%

Present value = $386.64

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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