Question

A bridge will cost (in the present) $280 million to build, will be completed by next year, and will start producing the benefits next year, $8 million per year. It will cost $1 million a year to maintain (starting next year, too). It is expected that the bridge will last for a long time. The market interest rate is 5%. Approximate (with the formula for perpetuity) the present value of the bridge project (including the cost of construction, benefits, and the cost of maintenance).

Answer 1

Using the formula for perpetuity:

$PV = -280 + \frac{(8 - 1)}{0.05} = - 140 million$