Question: A local road is in bad condition and needs to be repaired. Two construction options are being considered. Option A is a short-term option,

A local road is in bad condition and needs to be repaired.

Two construction options are being considered. Option A is a short-term option,

A local road is in bad condition and needs to be repaired. Two construction options are being considered. Option A is a short-term option, while Option B is more involved and expensive but has a considerably longer lifetime. Details on the two options are shown in the table. Assume MARR = 25%. Initial Cost ($ mil) Annual operating cost ($ mil) Annual Benefit ($ mil) Repair cost at the midlife (end of year 10) Lifetime (years) Option 1: 7 0.3 4 I LO 5 Option 2: 15 0.3 5 4 20 1. Find the internal rate of return of option A. 2. Find the internal rate of return of option B. 3. Find the incremental rate of return between two options.

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