A large company must build a bridge to have access to land f

A large company must build a bridge to have access to land for expansion of its manufacturing plant. The bridge could be fabricated of normal steel for an initial cost of $30,000 and should last 15 years. Maintenance (cleaning and painting) will cost $1,000 /year. If a more corrosion resistant steel was used, the annual maintenance cost would be only $100/year, although its life would be the same. In 15 years there will be no salvage value for either bridge. The company pays an income tax rate of 35% and uses MACRS depreciation. If the after-tax MARR is 12%, what is the maximum amount that should be spent on the corrosion resistant bridge?

Solution

Operating cash flow for normal steel = (0-1000-30000/15)*(1-42%) + 30000/15= 260

NPV of normal steel= -30000 + 260*(1-1/1.12^15)/12%=-28229.18

Let maximum amount be x

Operating cash flow for corrosion resistant steel = (0-100-x/15)*(1-35%) + x/15 = -65 + x/15*35%

For maximum value spent, NPV should be equal

-28229.18 = -x + (-65 + x/15*35%)*(1-1/1.12^15)/12%

X= 34393.04

maximum amount = 31992.65458