Annual maintenance costs for a particular section of highway pavement are $2500. The placement of a new surface would reduce the annual maintenance cost to $500 per year for the first 3 years and to $1000 per year for the next 7 years. After 10 years the annual maintenance would again be $2500. If maintenance costs are the only saving, what investment can be justified for the new surface? Assume interest at 5%.

Question

Poochie

Business

29 December, 05:41

Annual maintenance costs for a particular section of highway pavement are $2500. The placement of a new surface would reduce the annual maintenance cost to $500 per year for the first 3 years and to $1000 per year for the next 7 years. After 10 years the annual maintenance would again be $2500. If maintenance costs are the only saving, what investment can be justified for the new surface? Assume interest at 5%.

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Answers (1)

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Clay David · Answer 1

The maximum investment is $6,360.111

Explanation:

Giving the following information:

The placement of a new surface would reduce the annual maintenance cost to $500 per year for the first 3 years and to $1000 per year for the next 7 years. After 10 years the annual maintenance would again be $2500.

We need to find the net present value. The maximum initial investment will be the amount that makes the NPV cero.

NPV=∑[Cf / (1+i) ^n]

Cf = cash flow

For example:

Year 1 = 500/1.05 = 476.19

Year 3 = 500/1.05^3 = 431.92

Year 5 = 1,000/1.05^5 = 783.53

NPV = 6,360.111

The maximum investment is $6,360.111