The newly elected city mayor of Gulfsville decides to construct a new levee syst

Question

The newly elected city mayor of Gulfsville decides to construct a new levee system near the major river in the town. The estimated life of such a structure will be 40 years. Total initial costs (consulting fees and construction) would be $800,000. Maintenance cost would be $30,000 every 5 years. How much money should the city borrow now in order to carry out the entire project including maintenance? The inters rate is 5%. Illustrate your answer with a cash flow diagram. As a city engineer, you seek the capitalized cost of perpetual service from a water storage tank. Due to the

Explanation / Answer

Initial cost = 80000

Maintenance cost = $30000 every 5 years

interest rate = 5%

money to be borrowed today = initial cost +maintenance cost* present value factor

initial cost = 80000

+ maintenance cost at end of year5th = 30000* 0.7835 = 23505.78

+ maintenance cost at end of year10th = 30000 * 0.6139 =18417.40

+ maintenance cost at end of year 15th = 30000 * 0.4810 = 14430.51

+ maintenance cost at end of year 20th = 30000* 0.3769 = 11306.68

+ maintenance cost at end of year 25th = 30000 * 0.2953 = 8859.08

+ maintenance cost at end of year 30th = 30000 * 0.2314 = 6941.32

+ maintenance cost at end of year 35th = 30000 * 0.1813 = 5438.71

+ maintenance cost at end of year 40th = 30000 * 0.1420 = 4261.37

Total borrowing require173160.87

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