Your state's highway maintenance department is considering whether to buy an asset that delivers an annual...
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Your state's highway maintenance department is considering whether to buy an asset that delivers an annual benefit of $4.5 million each year it is in use, but the department does not know how long the asset will last. Instead, the department believes the lifetime of the asset is uniformly distributed with a minimum lifetime of 16 years and a maximum lifetime of 40 years. a. What is the expected present value of the asset, assuming a discount rate of 4%? b. Suppose the asset costs $70 million. Should the department buy the asset? Your state's highway maintenance department is considering whether to buy an asset that delivers an annual benefit of $4.5 million each year it is in use, but the department does not know how long the asset will last. Instead, the department believes the lifetime of the asset is uniformly distributed with a minimum lifetime of 16 years and a maximum lifetime of 40 years. a. What is the expected present value of the asset, assuming a discount rate of 4%? b. Suppose the asset costs $70 million. Should the department buy the asset?
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a To calculate the expected present value of the asset we can use the formula Expected Present Value ... View the full answer
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