Annual maintenance costs for a particular section of highway pavement are $2500. The placement of a new surface would reduce the annual maintenance cost to $500 per year for the first 3 years and to $1000 per year for the next 7 years. After 10 years the annual maintenance would again be $2500. If maintenance costs are the only saving, what investment can be justified for the new surface? Assume interest at 5%.

The maximum investment is $6,360.111

Explanation:

Giving the following information:

The placement of a new surface would reduce the annual maintenance cost to $500 per year for the first 3 years and to $1000 per year for the next 7 years. After 10 years the annual maintenance would again be $2500.

We need to find the net present value. The maximum initial investment will be the amount that makes the NPV cero.

NPV=∑[Cf/(1+i)^n]

Cf= cash flow

For example:

Year 1= 500/1.05= 476.19

Year 3= 500/1.05^3= 431.92

Year 5= 1,000/1.05^5= 783.53

NPV= 6,360.111

The maximum investment is $6,360.111

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