Macmillan Learning
Understanding Present Value - End of Appendix Problem
years,
Suppose that a major city's main thoroughfare, which is also an interstate highway, will be completely closed to traffic for two
from January 2018 to December 2019, for reconstruction at a cost of [tex]$535 million. If the construction company were to
keep the highway open for traffic during construction, the highway reconstruction project would take much longer and be more
expensive. Suppose that construction would take four years if the highway were kept open, at a total cost of $[/tex]800 million. The
state department of transportation had to make its decision in 2017, one year before the start of construction (so that the first
payment was one year away). Thus, the department of transportation had the following choices:
(i) Close the highway, at an annual cost of [tex]$267.5 million per year for two years
(ii) Keep the highway open during construction, at an annual cost of $[/tex]200 million per year for four years
a. Suppose the interest rate is 10%. Calculate the present value of the costs incurred under each plan. Report your answers in
millions of dollars.
Present value, two-year plan: [tex]$
million
Present value, four-year plan: $[/tex]
million
Which reconstruction plan is less expensive?
The two-year plan