Question

Question 3 - Capital Budgeting (Total 10 marks) The builders of the 407 extension to Waterloo have two options for building the highway: Asphalt costs $20,000,000 per kilometer to build and needs a major reconstruction every 7 years at the same $20 million cost per kilometer; Concrete cost more per kilometer to build ($30,000,000), but lasts 15 years before needing a major reconstruction at $30 million per kilometer. Use a 10% cost of capital. Required: (a) If the highway is provincially owned, and therefore not taxable, how should the high- way be built? (5 marks) (b) If a private-sector company owns the highway, paying tax at 40%, which material should be used if the CCA rate for the concrete highway is 10% and the CCA rate for the asphalt highway is 15%? (5 marks)

Answer 1

1. If the Highway Construction is owned by Province Government, Then they will build the concrete roads rather than building the Asphalt Road. The reasons are

A) It will cost less to the Government as compared to Asphalt roads block.

B) Long durability- The concrete roads are more durable than the Asphalt one. So it will engage in the Transportation Facility of the area as well as develop the area.

C) The maintenance cost is also low for the Concrete roads. And these types of roads also have the one time maintenance in bulk.

2. I think the private company should opt for the concrete roads. They will go with the Concrete roads building. Reasons for the same are

A) The long duration-

The private entities will be going to pay for the road network for per year. Thus they are going to choose the low interest rate roads. Because they are getting low tax expenditure for the same

B) Material used in the process- The material used on the buildings process of the road is may be high in concrete as compared to the asphalt roads but in future they will face the losses for its rebuilding and rehabilitation.

I think the private company should go with the concrete roads buildings.