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.)