Question

The transit authority wants to increase its bus services. The transit authority would purchase 300 new energy-efficient buses. They would replace the 150 buses now in operation, doubling the size of the transit system. At a unit cost of $800,000 for each bus, the total expenditure would be $240 million. The projected salvage value of the old buses is $20,000 per bus, leaving $237 million to be financed by the transit authority. .

The transit authority would purchase the buses, financing the purchase through borrowing. Assume a spread of 200 basis points over the revenue bond interest rate (which is 2.27%). However, because the transit authority is expecting to buy buses for transit authorities across the country, it expects to receive a 3%volume discount from the purchase price. Calculate the annual debt service cost for the transit authority.

Answer 1

Given, Transit authority Purchases 300 new buses which costs $800,000 each.

He replaces 150 bus which have a salvage value of $20,000 each.

So, the transit authority requires $237 million to finance.

It also given a spread of 200 basis points over the revenue bond interest rate which is 2.27%

200 basis points = 2%

Total Bond Interest rate = 2% + 2.27% = 4.27%

Given there would be a volume discount of 3% on purchase price.

Calculation of Annual Debt Service cost for the Transit Authority

Particulars	Amount
Cost of New Buses ($800,000 * 300)	$240,000,000
Discount @3%	$7,200,000 ($240,000,000 * 3%)
Net cost of New Buses	$232,800,000
Salvage Value of old buses ($20,000 * 150)	$3,000,000
Amount to be financed through borrowing	$299,800,000 ($232,800,000 - $3,000,000)
Annual Bond Interest Rate	4.27%
Annual Debt Service Cost	$12,801,460 ($299,800,000 * 4.27%)

So, the Annual Debt Service Cost for the Transit Authority is $12,801,460.