Question: Consider the same highway paving project from question 8 A
Consider the same highway paving project from question 8. A second politician says to you, “At an interest rate of 6%, the project is a bad idea. Over 10 years, the project reduces maintenance costs by a total of $3 billion. But borrowing $2 billion for 10years at a 6% interest rate means paying $1.58 billion in interest. The total cost of the project over 10 years is therefore $3.58 billion!” Use present value calculations to show that the project is, in fact, worth undertaking at 6% interest rate. What’s wrong with the second politician’s argument?
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