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?
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