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 1. cost $17.000 for initial construction and has annual maintenance cost of $1,000. The plans to withdraw money from the city's Brid and Highways account to open a special accoun cover the initial construction and to fund a to cover the maintenance costs forever. How me money must be withdrawn from the Bridges Highways account if the city can expect to ear 5 percent on the special account? a. $1,000 b. $17,000 c. $18,000 d. $37,000 perpetu

Explanation / Answer

1

Correct Answer:

D.$37000

Working note:

Initial cost = $17000

Annual maintenance cost = $1000

Time = perpetuity (infinite period)

R = 5%

Present value of total maintenance cost = Annual maintenance cost/R

Present value of total maintenance cost = 1000/.05 = $20000

Total funds required = initial cost + Present value of total maintenance cost

Total funds required = 17000 + 20000

Total funds required = $37000

Hence, $37000 should be withdrawn.

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