Question
Government XYZ is considering the addition of a road segment to the regional road system. Two options are available and your task is to determine
Government XYZ is considering the addition of a road segment to the regional road system. Two options are available and your task is to determine which of these options that is preferable from a financial perspective. Both projects have an estimated life-span of 30 years. The projected cash flows for the two options are outlined in the Table below. Assume that the discount rate has been set at 8 percent.
| Description of Cash Flow | Years passed before cash flow is assumed to accrue | Option 1: Projected cash flows | Option 2: Projected cash flows |
| Initial construction outlay | 1 | -$10,000,000 | -$10,000,000 |
| Maintenance outlay | 10 | -$200,000 | -$900,000 |
| Maintenance outlay | 15 | -$800,000 | -$100,000 |
| Salvage (inflow) | 30 | $200,000 | $1,000,000 |
Which of the two projects would you recommend based on NPV analysis? To receive credit you need to provide support for your answer by providing the NPV for each of the two options.
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
