Question
Westerlo needs to resurface a section of its roads this spring. The town council is considering using one of two technologies. The first involves putting
Westerlo needs to resurface a section of its roads this spring. The town council is considering using one of two technologies. The first involves putting down stone and gravel and grading the road on an annual basis. The second involves the application of a road surface called sure-pack. Sure-Pack only requires maintenance every five years. Based on experience, the counselors know the gravel road will last ten years. The folks in Berne, the next town up route 1, Sure-Packed their roads and expect to get 15 years from them before they will need to be resurfaced again. The cash flows for each alternative are shown in the table below.
Period | Gravel | Sure-Pack |
0 | $200,000 | $300,000 |
1 | $15,000 |
|
2 | $15,000 |
|
3 | $15,000 |
|
4 | $15,000 |
|
5 | $15,000 | $45,000 |
6 | $15,000 |
|
7 | $15,000 |
|
8 | $15,000 |
|
9 | $15,000 |
|
10 | $15,000 | $45,000 |
11 |
|
|
12 |
|
|
13 |
|
|
14 |
|
|
15 |
|
|
If Westerlos cost of capital is 9%, which alternative should they choose? Support your answer with the appropriate time-value-of-money calculations.
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