A municipality has just completed construction of a bridge. It was defined that

Question

A municipality has just completed construction of a bridge. It was defined that operation and maintenance (O&M) of this bridge will cost the city $20,000 for the first year with a 5% increase each year thereafter for the next 4 years. The bank rate is 7.5% a year. What interest rate should be used to calculate the present worth of annual expenditures on O&M during the upcoming five year period following the completion of the bridge?

a) 5.0%

b) 1.9%

c) 7.5%

d) 8.2%

e) 2.4%

a) 5.0%

b) 1.9%

c) 7.5%

d) 8.2%

e) 2.4%

Explanation / Answer

Correct Answer:

C

It is the bank rate that should be treated as a minimum required rate of return, while evaluating the present value of O&M cost. Here, the value of O&M cost in each year will be the % increase as per the given rate in the scenario.

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