Suppose that a major city’s main thoroughfare, which is also an interstate highw
ID: 2711910 • Letter: S
Question
Suppose that a major city’s main thoroughfare, which is also an interstate highway, will be completely closed to traffic for two years, from January 2014 to December 2015, for reconstruction at a cost of $535 million. If the construction company were to keep the highway open for traffic during construction, the highway reconstruction project would take much longer and be more expensive. Suppose that construction would take four years if the highway were kept open, at a total cost of $800 million. The state department of transportation had to make its decision in 2014, one year before the start of construction (so that the first payment was one year away). So the department of transportation had the following choices:
(i) Close the highway during construction, at an annual cost of $267.5 million per year for two years.
(ii) Keep the highway open during construction, at annual cost of $200 million per year for four years.
Suppose the interest rate is 10%. Calculate the present value of the costs incurred under each plan.
The present value of plan (i) is: $ million. (Round your answer to two decimal places.)
The present value of plan (ii) is: $ million. (Round your answer to two decimal places.)
Explanation / Answer
Land A
Land A a historic cost of 4 million and fair value of 5 Million.
Book value in GAAP = 4 Million dollar
Book Value - IFRS = 5 Million Dolllar.
Land B
Building B - GAAP
Historical cost $ 60
(-) Accumulated Depreciation (S20)
Carrying Value $40
Building B - IFRS
Historical cost $ 60
(-) Accumulated Depreciation (S20)
Carrying Value $40
Equipment C
GAAP
Historical cost $10
Accumulated Depreciation (6)
Carrying Value 4
Undiscounted Cash Flow 5
Discounted Cash Flow 3
No Impairment Carrying value 4
Impairment Carrying value 1
IFRS
Historical cost $10
Accumulated Depreciation (6)
Carrying Value 4
Undiscounted Cash Flow 5
Discounted Cash Flow 3
No Impairment Carrying value (has no choice)
Impairment Carrying value 3
Equipment D
GAAP
Historical cost $10
Accumulated Depreciation (3)
Impairment Wriiten down (2)
CV after impairment 5
Accu. Depre. (3)
Carrying value 2
IFRS
Historical cost $10
Accumulated Depreciation (3)
Impairment Wriiten down (2)
CV after impairment 5
Accu. Depre. (3)
Carrying value 2
CV if not impairment 2.5
Reversal of impairment 0.5
CV after revaluation 2.5
Equipment E
GAAP
Historical cost 12
Depreciation/year machine 1.5
Depreciation/year machine NA
Accumulated Depreciation (3.0)
Carrying Value in 2012 9
Carrying Value in 2013 7.5
Carrying Value in 2014 6
Carrying Value in 2015 4.5
Carrying Value in 2016 3.0
Carrying Value in 2017 1.5
Carrying Value in 2018 -
Equipment E
IFRS
Historical cost 12 IFRS
Depreciation/year machine 1.0
Depreciation/year machine 1.0 Machine Engine
Accumulated Depreciation (4.0) 7 3
Carrying Value in 2012 8 6 2
Carrying Value in 2013 6.0 5 1
Carrying Value in 2014 4 4 -
Carrying Value in 2015 6 3 3
Carrying Value in 2016 4.0 2 2
Carrying Value in 2017 2.0 1 1
Carrying Value in 2018 -
Equipment F
Date amount Disbursed Month O/S Weighted disbursement
Jan 1 10 12/12 10
July 1 10 6/12 5
IFRS
Gross interest 2
Date Payable Earnings Year income form investment
Jan 1 10 6 ½ 0.30
July 1 6 1/2 -
Equipment G GAAP
Historical cost 80000
Special Equipment Capitalised
(-) Accumulated depreciation (16000)
CV 64000
Equipment G IFRS
Historical cost 70000
Special Equipment 10000
(-) Accumulated depreciation (14000)
CV 56000
Equipment H
Date Amount capitized interest rate
Dec 31 2 0/12 10%
GAAP 2
IFRS 2.42
Total
GAAP
Land A 4000000
Bldg B 40000000
Equipment C 4000000
Equipment D 2000000
Equipment E 9000000
Equipment F 21500000
Equipment G 64000
Equipment H 2000000
Total 82564000
Total
IFRS
Land A 5000000
Bldg B 40000000
Equipment C 3000000
Equipment D 2500000
Equipment E 8000000
Equipment F 21700000
Equipment G 56000
Equipment H 2420000
Total 82676000
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