A 10-mile road is to be constructed. The initial cost is $500,000/mile

| November 24, 2016

A 10-mile road is to be constructed. The initial cost is $500,000/mile. Maintenance cost $20,000/mile/year and with an increase of $5000/mile yearly. The road will be resurfaced every 6 years at the cost of 40% of the initial cost. If resurfacing is performed, there is no need to do annual maintenance for that year. After resurfacing, the maintenance costs return to the same as the previous 6-year cycle. All costs are in today’s dollars (i.e. assume no inflation).

The corresponding cash flow diagram for the first two 6-year cycles is shown below. Fill in the missing amplitudes of all cash flows. Then compute the equivalent annual cost (in each cycle) of the maintenance and resurfacing costs (ignore the initial cost in this computation) if the inflation-free interest rate of 3%. Then find the amount of capitalized funds required to fund the maintenance and resurfacing costs, if the funds earns 5% annual interest rate.

Note: (A/F, 3%, 6) = 0.1546; (A/G, 3%, 6) = 2.4138

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