Question

The cost of rebuilding the Main Street Bridge in 2018 is $2,300,000.00. Engineers estimate the cost will rise by 8% if the project is delayed one year until 2019. If the risk free rate is 4%, what is the cost of delaying the project in terms of 2018 dollars?

Answer 1

Answer:

$92,000

Step-by-step explanation:

The risk-free interest rate is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. The cost of delaying the project will be the estimated 8% increase in cost - any income we can hypothetically make while delaying which is the 4% risk free rate multiplied by the current cost i.e. $2,300,000; therefore

The cost of delaying the project will be (8% - 4%) * $2,300,000 = $92,000