The state highway department is considering six routes for a new highway. Listed below are the estimated construction costs, maintenance costs, and the user cost associated with each route.
Route Construction Costs Annual Maintenance Costs Annual User Cost
A1 $1,100,000 $44,775 $540,000
A2 1,327,500 38,130 527,250
A3 1,525,000 33,500 517,000
A4 1,915,000 31,875 490,250
A5 2,125,000 28,500 460,500
A6 2,217,500 26,259 444,000
All costs are given per kilometer. The life of the highway is expected to be 30 years with no salvage value. If the interest rate is 8%, which route is most attractive?
a. Solve using incremental analysis
b. Solve using total investment analysis
c. If the estimated costs are in constant dollars, and the annual inflation rate is 8%, which route is favored?