Question

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 per year for the first five years and to $1,000 per year for the next five years. The annual maintenance after ten years would again be $2,000. If maintenance costs were the only savings, what is the maximum investment at the current time that can be justified for the new surface, with interest at 4%

Answer 1

An amount of $10,337 is the maximum investment at the current time that can be justified for the new surface.

Here, the Maximum investment equals the Present Worth of Benefits.

Maximum investment = $1,000 (P/A, 4%, 10) + $500 (P/A, 4%, 5)

Maximum investment = $1,000 (8.111) + $500 (4.452)

Maximum investment = $8,111 + $2,226

Maximum investment = $10,337

Hence, the amount of $10,337 is the maximum investment at the current time that can be justified for the new surface.

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