2. A Chinese official is considering construction of a gondola lift system that

Question

2. A Chinese official is considering construction of a gondola lift system that transports visitors from the tops of the mountain peaks to the valley at one of the National Forrest Parks in China. The lift system is expected to last for 20 years. Annual maintenance cost of $260,000 and inspection and repair cost of $45,000 every 5 years are expected. Annual benefits are estimated to be $420,000. In an interest of 18% per year and a B/C ration of at least 2.5 are used, what is the maximum investment cost allowed for the lift system?

Explanation / Answer

First we calculate the benefits then subtract the associated costs benefits 420000 yearly We calculate with interst s follows 420000*(1+interest)^time 420000*(1.18)^20=11505074.53 costs annual maintenance 260000*(1.18)^20=7122189 inspection/repair 45000*(1.18)^4=87245 Now we subtrct our cost from our benefits 11505074.53-7122189-87245=4295640.53 This is our total benefit therefore our max investment

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