Question 3 10 Marks Annual maintenance costs for a particula

Question 3 (10 Marks) Annual maintenance costs for a particular section of highway pavement are $2,000. The placement of a new surface would reduce the annual maintenance cost to $500 a year for the first five years and to $1,000 a year for the next five years. After 10 years the annual maintenance would again be $2,000. If maintenance costs are the only saving, what investment can be justified for the new surface? Assume interest at 4%.

Solution

Solution: 10,337

Working:

Maximum investment = PW of benefits

= [1,000 * (P/A,4%,10)] + [500 * (P/A,4%,5)]

= [1,000 * 8.111] + [500 * 4.452]

= 10,337