Question

You are the engineer who is responsible of constructing a new toll road. The discount rate is i=10% per year, and the study period is 30 years. Evaluate the economics of the proposal using: (a) present worth analysis

(b) the conventional B/C analysis and;

(c) the profitability index from in which disbenefits are not included.

Initial investment: $88 million distributed over 5 years; $4 million now and in year 5 and $20 million in each of years 1 through 4.

Annual M&O cost: $1 million per year, plus an additional $3 million each fifth year, including year 30.

Annual revenue/benefits: start at $2 million in year 1, increasing by a constant $0.5 million annually through year 10, and then increasing by a constant $1 million per year through year 20 and remaining constant thereafter.

Disbenefits from buying land and property in the road route surrounding areas: start at $10 million in year 1, decrease by $0.5 million per year through year 21, and remain at zero thereafter.

Answer 1

Formula used in excel

Net present value with discount factor

B/C = Benefits-Disbenefits-M&O Costs
                     Initial investments

PI=PV of future cash flows/Initila investments