The city council has approved the building of a new bridge over Running Water Cr

Question

The city council has approved the building of a new bridge over Running Water Creek. The bridge will cost $15,000 for initial construction and have an annual maintenance cost of $1,500. The council plans to withdraw money from the city’s Bridges and Highways account to open a special account to cover the initial construction and to fund a perpetuity to cover the maintenance costs forever. How much money must be withdrawn from the Bridges and Highways account if the city can expect to earn 5% on the special account?

a)16,500

b)45,000

c)15,000

d)1,500

Explanation / Answer

Initial Investment = $15000.

Present value of annual perpetuity maintenance costs = 1500/0.05 = $30000

Total amount ot be withdrawn is $15000+$30000 = $45,000.

The correct answer is option B.

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