Question

The action plan in the Boston Bike Network Plan anticipates spending $30 million in construction costs for work on establishing and renovating 100 miles of bike lanes in the city. The overall goal of the Boston Climate Action Plan is to reduce vehicle miles traveled (VMT) by 5.5% from 2005 levels, which would result in an estimated reduction of 68 thousand tons of CO2 per year. Assume the bike paths and VMT effects last for 30 years, the value of CO2 reduction is $40 per ton (based on another study), and the discount rate is 5%. In years 10 and 20, 10% of the original capital cost is spent for maintenance.

a. Calculate the B/C ratio, net present value, and internal rate of return for the bike path network.

Answer 1

BC ratio      =1.27

NPV = $8.84M  

IRR =   7.49%

lets identify the cash flows involved.

project cost is $30M in year 0 is an outflow

Value of CO2 reductions in dollar terms = C02 reduction per year X value per ton    is an inflow

                                                           =68000   X 40

                                                           2,720,000 = $2.72M per year for years 1 to 30

Maintenance cost of $3M ( 10% of $30M) is incurred in year 10 and year 20. other years nil.

constructing the above cash flows to a table and discounting the cash flows at 5% discount rate,

the total cost is the sum of capital cost and maintenance cost. PV of this total cost is computed at 5% discounting rate. the value of reduction in Co2 emissions will be the total benefits .PV of this total benefit is computed at 5% discounting rate

BC ratio   = PV of Benefits/ PV of Cost

              = 41.81 / 32.97

              =1.27

NPV = $8.84M   computed using NPV formula in excel at 5% discount rate

IRR =   7.49% computed using IRR function in excel

excel formulas