RR must build a tunnel to maintain his access around the mountain. The tunnel co
ID: 2491001 • Letter: R
Question
RR must build a tunnel to maintain his access around the mountain. The tunnel could be fabricated of normal steel for an initial cost of $30,000 and should last for 18 years. Maintenance will cost $1,000 per year. Another option would be to use corrosion resistant steel, which will last for 18 years, with annual maintenance cost of $100. In 18 years there would be no salvage value for either bridge. RR pays combined federal and state taxes at the 48% marginal rate and uses straight-line depreciation. If the after tax MARR is 10%. what is the maximum amount that should be spent on the corrosion-resistant tunnel? Enter your answer as follow: 123456.78Explanation / Answer
Present value of cash outflow under first alternative = Present Value of cash outflow under second alternative
30000 - (30000/18 x 0.48 x Cumulative PVF @ 10% for 18 years) + (1000 x 0.52 x Cumulative PVF @ 10% for 18 years) = X - (X/18 * 0.48* Cumulative PVF @ 10% for 18 years) + (100 x Cumulative PVF @ 10% for 18 years)
30000 - (800 x 8.201) + (520 x 8.201) = X - (X*0.02667*8.201) + (100 x 8.201)
27703.72 = X - (0.21869X) + 820.1
X = 34408.39
The maximum amount that can be invested in corrosion resistant steel is $34408.39
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