Question

It is currently 2018 and you are the mayor of Snowville, IL. Your public works department has determined that your town’s main highway needs to be repaved in the next two years. The cost to complete the project today would be $4,300,000. Your town’s engineers estimate that the project’s cost would increase by a total of 9% if delayed by two years to 2020. If the risk-free annual rate is 4% per year, what is the cost, in terms of 2018 dollars, of deciding to delay the project by 2 years? (Select the most appropriate answer below)

Answer 1

Answer:

the net cost for delaying the project will be of 36,120 dollars.

Explanation:

4,300,000 investment

if delayed will increase by 9%

4,300,000 x 0.09 = 387,000 inrease in cost

this cost will be mitigated by the revenue on the interest.

the funds will be placed at 4% per year during two years:

4,300,000 x (1.04^2 - 1) = 350.880‬ interest revenue

net : 36,120