Question: Old Town needs to resurface a section of its roads

Old Town 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 the first year and grading the road on an annual basis for the next 10 years. The second involves the application of a road surface called Sure-Pack. Sure- Pack requires maintenance only every five years. Based on experience, the town counselors know the gravel road will last 10 years. The folks in Hiltown, 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 which continues in the next column. If Old Town’s discount rate is 8 percent, which alternative should they choose? Use an annualized cost analysis to support your answer.

A. Solve using a spreadsheet program such as Excel.
B. Solve using a financial calculator(optional).

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  • CreatedDecember 19, 2014
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