You are the Director of your state's Department of Transportation. A railroad operating in your state has just served notice of its intentions to abandon a 25 mile branch line. Two towns are located on this branch line. The first town is a small agriculture community of 3,000 located 8 miles from the junction of the railroad's mainline. The town has a grain elevator which has traditionally shipped 70% of its tons by rails. The second community located at the end of the branch line has a population of 16,000. The economy of the second town is dependent upon two manufacturing firms who also use rail extensively for receiving and shipping goods. The closing of the branch line has become a political "hot potato." The lawmakers and the Governor are concerned that if the freight transportation demands of the manufacturing companies cannot be met, they will eventually leave the communities. However, both companies indicated that they would stay if adequate facilities or transportation service were available. If the rail branch line is closed, a 20 mile stretch of a state highway connecting the two communities with the interstate highway would have to be rebuilt. It was estimated that the road would take one year to reconstruct. Also, an enterprising entrepreneur has petitioned the state for funds to purchase, rehabilitate and operate the branch line as a Class III railroad. The loan would be subsidized by being at a lower interest rate than the state would normally receive. You have been assigned the task of developing a strategy for evaluating each alternative and deciding which project, if any, is deserving the state resources. The following data have been made available to you. DATA Calculate for a 20 year time span. Loan interest rate to Class III RR = 5.5% State Opportunity Cost = 6.5% Purchase Cost of Right-of-Way = $1.5 Million Rehabilitation Cost (1 year) = $25,000/mi. Engine Purchase Cost = $200,000 (Assume that the entrepreneur would finance these three items with the loan from the state) Yearly engine maintenance Cost = $7,000 + .05x (yearly mileage) Yearly engine operating cost = $4,500 + 2x (yearly mileage) Yearly crew & misc. cost = $30,000 + 20x (yearly man-hours) Derailment costs = $4,000/yr. Yearly track maintenance cost = $6,000/mi. Round trip travel time = 8 hours Frequency = 3 days/week Crew Size = 2 men Revenue received = 5 cents per ton-mile (all commodities) Carloads- 1991 (Assume constant over 20 yrs. Grain Elevator = 10 cars/month = 70 tons/car Factory = 5000 cars/yr = 64 tons/car Factory 2 = 2500 cars/yr = 50 tons/car State Funds Required Highway reconstruction cost = $200,000/mi Yearly maintenance cost (Due to additional truck traffic) = $300/lane-mi Assume: Revenue generated from additional truck traffic through gasoline tax will be used to defray the highway reconstruction and maintenance cost. Also, basic section costs and accident costs do not need to be considered. Revenue Generated: Trucks -7 cents/gal. (Trucks average 4 mi/gal.) Truck Loads (Annual) Grain elevator (4 mi. from Interstate) = 350 trucks Factory 1 (20 mi. from Interstate) = 12,000 trucks Factory 2 (20 mi. from Interstate) = 5,500 trucks [Hint: For the railroad project to be a viable option, the entrepreneur needs to be satisfied, and the cost to the state of financing the railroad should be less than the cost of building the highway].
. You are the Director of your state's Department of Transportation. A railroad operating in your state has just served notice of its intentions to abandon a 25 mile branch line. Two towns are located on this branch line. The first town is a small agriculture community of 3,000 located 8 miles from the junction of the railroad's mainline. The town has a grain elevator which has traditionally shipped 70% of its tons by rails. The second community located at the end of the branch line has a population of 16,000. The economy of the second town is dependent upon two manufacturing firms who also use rail extensively for receiving and shipping goods.
The closing of the branch line has become a political "hot potato." The lawmakers and the Governor are concerned that if the freight transportation demands of the manufacturing companies cannot be met, they will eventually leave the communities. However, both companies indicated that they would stay if adequate facilities or transportation service were available.
If the rail branch line is closed, a 20 mile stretch of a state highway connecting the two communities with the interstate highway would have to be rebuilt. It was estimated that the road would take one year to reconstruct. Also, an enterprising entrepreneur has petitioned the state for funds to purchase, rehabilitate and operate the branch line as a Class III railroad. The loan would be subsidized by being at a lower interest rate than the state would normally receive.
You have been assigned the task of developing a strategy for evaluating each alternative and deciding which project, if any, is deserving the state resources. The following data have been made available to you.
DATA
Calculate for a 20 year time span.
Loan interest rate to Class III RR = 5.5%
State
Purchase Cost of Right-of-Way = $1.5 Million
Rehabilitation Cost (1 year) = $25,000/mi.
Engine Purchase Cost = $200,000
(Assume that the entrepreneur would finance these three items with the loan from the state)
Yearly engine maintenance Cost = $7,000 + .05x (yearly mileage)
Yearly engine operating cost = $4,500 + 2x (yearly mileage)
Yearly crew & misc. cost = $30,000 + 20x (yearly man-hours)
Derailment costs = $4,000/yr.
Yearly track maintenance cost = $6,000/mi.
Round trip travel time = 8 hours
Frequency = 3 days/week
Crew Size = 2 men
Revenue received = 5 cents per ton-mile (all commodities)
Carloads- 1991 (Assume constant over 20 yrs.
Grain Elevator = 10 cars/month = 70 tons/car
Factory = 5000 cars/yr = 64 tons/car
Factory 2 = 2500 cars/yr = 50 tons/car
State Funds Required
Highway reconstruction cost = $200,000/mi
Yearly maintenance cost (Due to additional truck traffic) = $300/lane-mi
Assume: Revenue generated from additional truck traffic through gasoline tax will be used to defray the highway reconstruction and maintenance cost. Also, basic section costs and accident costs do not need to be considered.
Revenue Generated: Trucks -7 cents/gal. (Trucks average 4 mi/gal.)
Truck Loads (Annual)
Grain elevator (4 mi. from Interstate) = 350 trucks
Factory 1 (20 mi. from Interstate) = 12,000 trucks
Factory 2 (20 mi. from Interstate) = 5,500 trucks
[Hint: For the railroad project to be a viable option, the entrepreneur needs to be satisfied, and the cost to the state of financing the railroad should be less than the cost of building the highway].
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