A light-rail transportation project is proposed to connect the centre of a city to a growing suburban neighbourhood.

A light-rail transportation project is proposed to connect the centre of a city to a growing suburban neighbourhood. The project is expected to cost $480 million for construction, right-of-way purchase, and traffic control systems. Half the cost must be allocated at the beginning of the project and the other half is paid upon construction completion. Construction is expected to take two years. The useful life of this project is 20 years after construction is completed. Operation and maintenance cost is expected to be $13 million per year after construction is completed. The project is expected to generate ridership revenues of $38 million per year (after construction).

This new transportation alternative is expected to generate a total of $26 million per year in benefits in terms of travel time savings and safety improvements. Because this is a public project, the ridership revenues in terms of tickets are to be treated as negative costs not benefits, i.e., there is no direct benefit to the society by charging consumers. The social discount rate for this project is chosen to be 3%.

Calculate the benefit/cost ratio of this project and comment on its feasibility.

Expert Solution

Rahul Sunny answered 2 years ago

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