Question

Resurfacing a particular section of highway would result in cost of maintenance savings of $500 per year for the first five years and $1,000 per year for the next five years. If maintenance costs are the only consideration, the maximum amount to spend now on the project at 5% interest is

Answer 1

The present value of all cashflow needs to be discounted to arrive at the maximum spending that is prudent now.

Present value = Sum of (CFn / (1+r%)^n)

where n is the nth year

CFn is the cashflow of that particual year

r% is the interest rate

Present value = 500 / (1+5%)^1+500 / (1+5%)^2+500 / (1+5%)^3+500 / (1+5%)^4+500 / (1+5%)^5+

1000/(1+5%)^6++1000/(1+5%)^7+1000/(1+5%)^8+1000/(1+5%)^9+1000/(1+5%)^10= $ 5557