Christine is a new homebuyer. She wants to make sure that she incorporates the c

Question

Christine is a new homebuyer. She wants to make sure that she incorporates the cost of maintenance into her decision. She estimates that routine repairs and maintenance on the home she is considering will be $1,200 in the first year (one year from now). Due to the increasing age of the home, she expects that maintenance costs will increase 9% annually. The interest rate is 6%. If she plans to be in the home for 10 years, what is the present value of all future maintenance?

A7701.9 B 11022.46 C 12876.94 D 8832.10

Explanation / Answer

Maintenance in 1st year = $1,200
Growth rate = 9%
Interest rate = 6%
Period = 10 years

Present Value = $1,200/1.06 + $1,200*1.09/1.06^2 + $1,200*1.09^2/1.06^3 + ... + $1,200*1.09^9/1.06^10
Present Value = ($1,200/1.06) * [1 - (1.09/1.06)^10] / [1 - (1.09/1.06)]
Present Value = $1,200 * 10.73078
Present Value = $12,876.94

So, present value of all future maintenance is $12,876.94

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.