(6 points) RR must build a tunnel to maintain his access around the The tunnel f

Question

(6 points) RR must build a tunnel to maintain his access around the The tunnel fabricated of normal steel for an initial cost of $40,000 and should last for 15 years. Maintenance will cost $1,500 per year. Another option would be to use corrosion resistant steel, which will last for 15 years, with annual maintenance cost of $500. In 15 years there would be no salvage value for either tunnel. RR pays combined federal and state taxes at the 40% effective rate and uses straight-line depreciation. If the after tax MARR is 10%, what is the maximum amount that should be spent on the corrosion-resistant tunnel? mountain. could be

Explanation / Answer

Answer

The maximum amount that should be spent on the corrosion-resistant tunnel:

Both projects to be equivalents, hence Cast flow must be Equal

Initial cost+(Maintenance cost*PVIFA factor) = Initial cost+(Maintenance cost*PVIFA factor)

$40000+($1000*7.6061) = C+($500*7.6061)

$40000+$7606.10 = C+$3803.05

C     =$40000+$7606.10-$3803.05

C     =$43803.05

So,The maximum amount that should be spent on the corrosion-resistant tunnel is $43803(Aprrox)

Note:(depreciation is non cash Expenses.so we shall not consider depreciation in cash flow computation.)

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