There are plans to build new connection roads to an antique site to increase tourism into the area. The site can be reached by extending railroads, or by building a temporary bridge. The new railroad will have an initial cost of $40 million and must be resurfaced every 5 years at a cost of $1 million. The annual inspection and operating costs are estimated to be $60,000. The first possible temporary bridge will last 20 years and have an initial cost of $8 million, annual operating costs of $120,000 and a salvage value of $1 million. The second possible temporary bridge will last 15 years and have an initial cost of $6 million, annual operating costs of $150,000 and a salvage value of $1.2 million. It also needs to be resurfaced every 3 years for $200,000. Compare the three alternatives using annual worth analysis and an interest rate of 4% per year. a) Which one is the best alternative? b) For the other two alternatives to be economically equivalent, what should their first costs be? Cash flow, $ First cost Annual cost Resurfacing cost Salvage value Life, years Railroad 40 M 60 K 1M 8 Temporary Temporary bridge 1 bridge 2 8 M 120 K 1 M 20 6 M 150 K 200 K 1.2 M 15

There are plans to build new connection roads to an antique site to increase tourism into the area. The site can be reached by extending railroads, or by building a temporary bridge. The new railroad will have an initial cost of $40 million and must be resurfaced every 5 years at a cost of $1 million. The annual inspection and operating costs are estimated to be $60,000. The first possible temporary bridge will last 20 years and have an initial cost of $8 million, annual operating costs of $120,000 and a salvage value of $1 million. The second possible temporary bridge will last 15 years and have an initial cost of $6 million, annual operating costs of $150,000 and a salvage value of $1.2 million. It also needs to be resurfaced every 3 years for $200,000. Compare the three alternatives using annual worth analysis and an interest rate of 4% per year. a) Which one is the best alternative? b) For the other two alternatives to be economically equivalent, what should their first costs be? Cash flow, $ First cost Annual cost Resurfacing cost Salvage value Life, years Railroad 40 M 60 K 1M 8 Temporary Temporary bridge 1 bridge 2 8 M 120 K 1 M 20 6 M 150 K 200 K 1.2 M 15

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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