QUESTION 2 The city council of a fast growing city in the west of Canada is planning to construct a new tunnel to help improve the traffic flow in the city. Construction is to start in 2020 and is expected to last for four years at a cost of $16 million per year. After construction is completed, the regular cost of operation and maintenance is expected at $1 million for the first year, increasing by $80,000 per year thereafter. To help the city recover the construction cost, the tunnel will operate for the first 25 years as a toll way (till end of 2048). Expected return from toll fees is estimated at $8 million per year. Consider the present to be the end of 2018/beginning of 2019, the service life of the project to be till end of year 2058, and the interest rate to be 6%. a) Draw a cash flow diagram for this project. b) What is the Present Worth of the project? (7 Marks) c) What is the Annual Worth of the project from 2018 till 2058? (Hint: make use of the PW calculated in part b)). (8 Marks) d) Is it a good investment for the city to make? (7 Marks) (3 Marks)
QUESTION 2 The city council of a fast growing city in the west of Canada is planning to construct a new tunnel to help improve the traffic flow in the city. Construction is to start in 2020 and is expected to last for four years at a cost of $16 million per year. After construction is completed, the regular cost of operation and maintenance is expected at $1 million for the first year, increasing by $80,000 per year thereafter. To help the city recover the construction cost, the tunnel will operate for the first 25 years as a toll way (till end of 2048). Expected return from toll fees is estimated at $8 million per year. Consider the present to be the end of 2018/beginning of 2019, the service life of the project to be till end of year 2058, and the interest rate to be 6%. a) Draw a cash flow diagram for this project. b) What is the Present Worth of the project? (7 Marks) c) What is the Annual Worth of the project from 2018 till 2058? (Hint: make use of the PW calculated in part b)). (8 Marks) d) Is it a good investment for the city to make? (7 Marks) (3 Marks)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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