Question

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 highway 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

The detailed explanation for both the questions has been uploaded as pictures. Picture 1,2 correspond to Question 1 and Picture 3,4 correspond to Question 2

The one important point that we need to consider while dealing this problems like this is the number of years of both the materials is not the same. Hence we need to make them the same and then proceed with solving.

Solution 1:

Solution 2: