b)A bridge is to be constructed now as part of a new road. An analysis has shown
ID: 2727926 • Letter: B
Question
b)A bridge is to be constructed now as part of a new road. An analysis has shown that traffic density on the new road will justify a two-lane bridge at the present time. Because of uncertainty regarding future use of the road, the time at which an extra two lanes will be required is currently being studied. The estimated probabilities of having to widen the bridge to four lanes at various times in the future are as follows. The present estimated cost of the two-lane bridge is $2,000,000. If constructed now, the four-lane bridge will cost $3,450,000. The future cost of widening a two-lane bridge will be an extra $2,000,000 plus $250,000 for every year that widening is delayed. If money can earn 12% per year,
Widen Bridge in 3 years 4 years 5 years 6 years Probability 0.1 0.2 03 0.4Explanation / Answer
Ans;
Year Probability Cost Interest can earned Net amount Probable Cost PVF @ 12% PV of Cost Amount needs to invested Probabilty of Investment Probabilty of Investment interest PV of Investment 1 1 240,000 (240,000) (240,000) 0.89 (214,286) 2,000,000 - 2 1 240,000 (240,000) (240,000) 0.80 (191,327) 2,000,000 - 3 0.1 750,000 216,000 534,000 53,400 0.71 38,009 2,000,000 200,000 216,000 142,356 4 0.2 1,000,000 192,000 808,000 161,600 0.64 102,700 2,000,000 400,000 192,000 254,207 5 0.3 1,250,000 168,000 1,082,000 324,600 0.57 184,187 2,000,000 600,000 168,000 340,456 6 0.4 1,500,000 144,000 1,356,000 542,400 0.51 274,797 2,000,000 800,000 144,000 405,305 602,000 194,080 2,000,000 1,142,324 1,142,324 16.99% Rate of Interest will be 16.78%Related Questions
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