The City of Omniville has two options for a viaduct. One is a permanent cement canal and the other a cast iron (CI) pipe. If details for the options are as shown, at what rate of interest should the city be indifferent to either choice?
|Cement Canal||CI PIPE|
|Annual maintenance cost||$700,000||$875,000|
|Initial Rate||14.0%||p. y.|
Group of answer choices
PV of annual maintenance cost = Annual maintenance cost/ Initial rate = 700000/0.14 = 5000000
Total NPV of cash outflow = Initial cost + PV of annual maintenance cost
= 6000000 + 5000000 = 11000000$ (cash outflow)
PV of annual maintenance cost for 30 years = Annual maintenance cost * (PVIFA 30 years , X%)
PV of residual income at year 30 = Residual income / (1+ X%)
NPV = 5500000 + PV of annual maintenance cost for 30 years - PV of residual income at year 30 = 11000000
Now solve for X by computing equation
You can also use trail and error method
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