Answer:
$10,985.73
Explanation:
The worth of the extended warranty in today's terms is the present value of all year-end repair expenses expected to be incurred in extending the warranty whereby the interest rate of 6% is the appropriate discount rate in this case as shown thus:
Present value of a future cash flow=cash flow/(1+discount rate)^n
n is the year in which the cash flow is expected, it is 1 for year 1 repair expenses , 2 for year 2 and so on.
PV of repair expenses=$2000/(1+6%)^1+$2000/(1+6%)^2+$4000/(1+6%)^3+$5000/(1+6%)^4
PV of repair expenses= $10,985.73
