A 10-mile stretch of state highway is to be reconstructed at a total cost of $30,000,000. Road users' costs on the existing facility are currently $2,000,000/year and maintenance costs are $6,000/year.
The new facility will reduce these to $1.000.000/year and $2.000/year, respectively.
There are two funding/construction options. First, the highway can be rebuilt now, in one year, with a serial bond issue bearing 6%/year, issued for 20 years. Second, if financed out of current taxes, construction will proceed at 2 miles/year, taking 5 years to complete.
With this option, in each year 1/5 of the construction cost will be paid, and 1/5 of the maintenance and users' costs reductions is experienced.
In either instance, the service life of the new road is considered to be 30 years from the project inception.
The minimum desirable rate of return is 89%/year. As the project manager, which funding plan would you recommend to the state? Why?