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Q21E

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Intermediate Accounting (Kieso)
Found in: Page 305

Short Answer

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?

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

See the step by step solution

Step by Step Solution

Step 1: Computation expected cash flow

Step 2: Computation of present value

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