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Capital Budget Issue – Road Repair
Part 1.
You are the Town Manger and have a stretch of road that has a current cost to maintain of $900. This cost is compounding at an annual rate of 3%. You evaluate a capital expenditure to pave the road at a cost of $10,000. Included in the cost is a contract with the vendor to maintain the road (patching, etc.) every 5 years ($800 each instance). You have 3 options:
Continue to maintain the road
Pay for the Capital Cost in this year’s budget and pay for the maintenance costs every five years.
Finance the road construction upfront cost of $10,000. You would still need to pay for the maintenance costs every 5 years separately.
Use the below spreadsheet to help evaluate your options. Tell me what option you would select to deal with the road situation. What are the financial impacts and considerations for each situation? You do not need to do any other math related to the scenario, such as discount rates, cost benefit analysis, etc.
Part 2
Would your analysis above change in any way if the following additional info is presented?
You are about to make your recommendation to the Town Board when the Police Chief approaches you. He says that the road:
Averages 3 car accidents per year with a repair cost to the vehicles of $30,000 and injury related costs of $30,000. That is higher than the town average for roads.
If the road is maintained in the current manner, it will likely have similar accident results.
If the road is paved, he believes the accidents on the road will match the town average, which is 2 per year, with a repair cost of $20,000 and injury costs of $20,000.
No additional math needs to be done by you for this scenario. However, does this information change or reinforce your opinion on what to recommend? Explain.
Regardless of what you recommend to the Town Board, explain how you could use this information to support the capital expenditure when you meet with the board.
