Unformatted text preview: 03. Exam Number 3. (20 Points) This problem considers inﬂation. The general inﬂation rate is 3%. The minimum acceptable rate of return is 11%. This includes an allowance for inﬂation (it is the
market MARR). ”I qr? The city engineer has prepared a plan for the construction and maintenance of roads in a city park. The plan meets road requirements for the next 40 years. The plan' IS developed' in three
stages; $300, 000 is to be spent immediately, followed by $250, 000 at the end of 15 years and
$300, 000 at the end of 30 years. These three expenditures are the development costs. Maintenance for the plan will be $75, 000 peryear for the ﬁrst 15 years and $125, 000 for
each of the subsequent years. In addition, the roads will be resurfaced every 5 years for a cost of $20, 000 each time. Resurfacing is not required in the 40s. year. These are the maintenance
costs. At the end of forty years, it is believed the equipment may be sold for $150, 000. This is the
resale revenue. All casts and revenues noted above are estiniatgfiism' ' usingtoday’ 5 _prices. The development [\MZRR
costs are expected escalate at a 9% annual rife. The maintenance costs are expected to %’< escalate at a 1% rate. The resale value of the equipment is expected to escalate at a 4%//]
annual rate. For the solutions below expiessallarnounts' in dﬁusands of dollars. A
am MAR line 3 'l' MARRp'YEI
8%
b. Considering inﬂation what are the development costs estimated in actual an real dollars?( (l t 3 > —'l——— _al Cost #6
kw“ 3? $300, 000 is to be spent immediately 300. k
\ $250, 000 at the end of 1.5 years
2 to .000 It I if ' ' a. What is the real MARR? 7. 77% $300,000 at the end of 30 years. I “941 :59, "f mo a my; D = leaKt”. we)“
is. Inrealdoil'arsr, whatistheresalerevenne? 221 D“: ‘EnKite)“ MIL» * W
d. Construct a model of the situation us g diesgconomics addin. Submit your model. e What is the NPW of the plan? Dn=CnU 3+5? 1416 The total cash expended rs total of all costs less the total of all revenues over the 40 years b%+_.f§)u‘ 7,
when the cash ﬂow' is expressed in actual dollars. (1.! What is the total cash expended? ( 308:3: ‘J L
' is
' r, 8,
MA? 1‘ IE 3 + ' 3 ...
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 Spring '10
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