Question

Minnesota transportation department will be widening a one-lane road into a two-lane freeway in the summer. The project requires the purchase of $21m worth of land for the additional lane. if the department uses an interest rate of 6%, what is the EAC of the right of way? Assume perpetual life since right of way do not wear out

Answer 1

We have the following information

Cost of the land = $21,000,000

Interest rate (i) = 6% per annum or 0.06

Life = perpetual, so we take it to be 100

Equivalent annual cost of the project = 21,000,000(A/P, i, n)

Equivalent annual cost of the project = 21,000,000(A/P, 6%, 100)

Equivalent annual cost of the project = 21,000,000[0.06(1 + 0.06)¹⁰⁰/((1 + 0.06)¹⁰⁰ – 1)]

Equivalent annual cost of the project = 21,000,000 × 0.0602

Equivalent annual cost of the project = $1,264,200