The State of DeNile built a new toll road 3 years ago for $900 million. The...

The State of DeNile built a new toll road 3 years ago for $900 million. The state can charge tolls on the road for the next 20 years and expects to spend $3 million per year on maintenance and toll collection. Toll revenue is expected to be $80 million per year. The state has recently received an offer from the Otto Corporation to lease the road for 20 years. The company will pay DeNile $1 billion and will receive exclusive rights to collect and keep the tolls. Otto Corp will also be responsible for all maintenance and other expenses. The state can invest its money at 6% annual return. Should the state take this offer? Why or why not?

Expert Solution

We should select the 2nd option i.e. lease the Road to DeNile for $1B

This will result in benefit of $116.82 M as compared to other option

Solution : Calculate the NPV and than compare the options

Formula:

Solution:

Option A cashflow:

jeff jeffy answered 2 years ago

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