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Tuesday, March 29, 2011

Major math fail

A contributor to the Huffington AOLpost has a very interesting comparison. The subject is the costs of two rail projects, the high speed rail he rejected and improvements to an existing and popular slow rail service.

He or she compares an annual cost of "as low as" $750,000 to a one-time cost of $12 million, and goes on to say that, with those numbers, Scott Walker is supporting spending 16 times as much. That's a major failure of mathematics. Assume both of those figures are accurate, and that there are zero cost savings from the $12 million construction. At 5% interest, a perpetuity of $750,000 has a present value of $15 million.

It's also a failure of logic. I don't expect people to understand the theory of interest. But a perpetuity is the easiest thing to calculate. The value of a perpetuity (a level stream of money) of 1 is 1/i, where i is the assumed interest rate. Still, it doesn't take a genius to understand that directly comparing a one-time cost to an annual cost makes no sense.

The bottom line: Even under the least favorable monetary calculations, Scott Walker is spending less money.

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