The local highway department is preparing an economic analysis to see whether reconstruction of the pavement on a mountain road is justified. The number of vehicles traveling on the road increases each year hence the benefits to the motoring public of the pavement reconstruction also increase. Based on a traffic count, the benefits are projected as follows:
Year End-of-Year Benefit
2001 .....................................$10,000
2002 ..................................... 12,000
2003 ..................................... 14,000
2004 ..................................... 16,000
2005 ..................................... 18,000
2006 ..................................... 20,000
and so on, increasing
$2000per year
The reconstructed pavement will cost $275,000 when it is installed and will have a 15-year useful life. The construction period is short hence a beginning-of year reconstruction will result in the end-of-year benefits listed in the table. Assume a 6% interest rate. The reconstruction, if done at all, must be done not later than 2006. Should it be done, and if so, in what year?