Answer to Question #105758 in Microeconomics for k

Question

5. A bridge would cost $200 million to build (this cost must be incurred now). After it’s built, starting next year, the bridge will last for 60 years. Each year when the bridge is in use, we expect it to generate $5 million worth of benefits and cost $1 million per year to perform maintenance. The interest rate is 2%. Should we build this bridge? Show your calculations and explain your decision (to build or not to build)

Answer 1

Building cost =$200 million.

if in 60 years it generates $5 million per year and is maintained for $1 million per year then;

in 60 years the value of bridge will be

$(\$200 +( \$5*60) -(\$1*60))$ million =$440 million

Therefore the bridge is a productive one and should be build because it add value rather than subtracting on it original cost.