Question: A new 2-lanc road is needed in a part of town that is growing. At some point the road will need 4 lanes to handle the anticipated traffic. If the city's optimistic estimate of growth is used, the expansion will be needed in 4 years. For the most likely and pessimistic estimates, the expansion will be needed in 8 and 15 years, respectively. The expansion will cost S4.2 million. Use an interest rate of 8%.
(a) What is the present worth (PW) for each scenario, and what is the range of values?
(b) Use scenario analysis method to find the mean value of the expansion's PW.
(c) If the most likely estimate has a probability of 0.6, and the optimistic estimate has a probability of 0.1, what is the expected PW of the expansion?