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Government XYZ is considering the addition of a road segment to the regional road system. Two options are available and your task is to determine which of these options that is preferable from a financial perspective. Both projects have an estimated life-span of 30 years. The projected cash flows for the two options are outlined in the Table below. Assume that the discount rate has been set at 8 percent.
Description of Cash Flow |
Years passed before cash flow is assumed to accrue |
Option 1: Projected cash flows |
Option 2: Projected cash flows |
Initial construction outlay |
1 |
-$10,000,000 |
-$10,000,000 |
Maintenance outlay |
10 |
-$200,000 |
-$900,000 |
Maintenance outlay |
15 |
-$800,000 |
-$100,000 |
Salvage (inflow) |
30 |
$200,000 |
$1,000,000 |
Which of the two projects would you recommend based on NPV analysis?
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