Determine maximum equivalent annual amount for maintenance – Business Economics
An old wooden bridge over a bay is in danger of collapse. The highway department is considering two alternatives to alleviate the situation and provide for expected increases in future traffic. One plan is a conventional steel bridge, and the other is a tunnel. The department is familiar with bridge construction and maintenance, but has no experience with maintenance costs for tunnels. The following data have been developed for the bridge:
First cost $17,000,000
Painting every 6 years $1,000,000
Deck resurfacing every 10 years $3,000,000
Structural overhaul after 15 years $4,000,000
Annual maintenance $300,000
The tunnel is expected to cost $24,000,000 and will require repaving every 10 years at a cost of $2,000,000. If both designs are expected to last 30 years with minimal salvage value, determine the maximum equivalent annual amount for maintenance that could be permitted for the tunnel while holding the total equivalent annual cost equal to that of the bridge. The interest rate is 8%
