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 wil 1. cost $17,000 for initial construction and annual maintenance cost of $1.00, The plans to withdraw money from the city's Brid and Highways account to open a special acce cover the initial construction and to fund a to cover the maintenance costs forever. How me,k money must be withdrawn from the Bridges Highways account if the city can expect to ea 5 percent on the special account? a. $1,000 b. $17,000 c. $18,000 d. $37,000

Explanation / Answer

The money to be withdraw would be equal to the amount required for the construction plus the value of annual mainetnance. The maintenance will be for perpuity and value of any perpetual cash flow is determined by dividing the amount of cash flow with the relevant interest rate. The rate would be 5 per cent in our case as this is rate at which you would be investing the same.

Amount required = $17000 + ($1000 / 0.05) = $37,000 (Option d)

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