E6-21B (Expected Cash Flows and Present Value) Jim 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 truck.

E6-21B (Expected Cash Flows and Present Value) Jim 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 truck. While there is some uncertainty about the cost of engine overhauls in 4 years, by conducting some research online, Jim has developed the following estimates.

              Engine Overhaul                                     Probability

         Estimated Cash Outflow                          Assessment

              $ 500                                                               10%

              1,200                                                               25%

              2,000                                                               50%

              2,500                                                               15%

Instructions

How much should Jim Bowie deposit today in an account earning 4%, compounded annually, so that he will have enough money on hand in 4 years to pay for the overhaul?