Detroit, MI needs to resurface a 3-mile stretch of highway. Wilson Contracting Company has proposed two methods of resurfacing. The first method is a concrete surface for a cost of $1.5 million and an annual maintenance cost of $10,000. The second method is an asphalt covering for a cost of $1 million and an annual maintenance cost of $50,000. However, Wilson requests that every third year the asphalt highway be touched up at a cost of $75,000. Detroit uses the interest rate on bonds, 6% on its last bond issue, as the discount rate.
a. Determine the Breakeven number of years of the two methods. If Detroit expects an interstate to replace this stretch of highway in ten years, which method should be selected providing specific support comments?
b. If the touch-up cost increases by $5,000 per mile every three years, is the decision sensitive to this increase?