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The city council has approved the building of a new bridge over Running Water Creek. The bridge will cost $17,000 for initial construction and have an annual maintenance cost of $1,000. The council plans to withdraw money from the city’s Bridges and Highways account to open a special account to cover the initial construction and to fund a perpetuity to cover the maintenance costs forever. How much money must be withdrawn from the Bridges and Highways account if the city can expect to earn 5 percent on the special account?

Respuesta :

Answer:

$37,000

Explanation:

Data provided in the question

Initial construction cost = $17,000

Annual maintenance cost = $1,000

The discount rate = 5%

So, by considering the above information the withdrawn amount is

= Initial construction cost + Annual maintenance cost ÷ discount rate

= $17,000 + $1,000 ÷ 5%

= $17,000 + $20,000

= $37,000

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