Question

Population increase in northern Virginia requires new road constructions and repairs annually from 2018. More public schools will be also needed by 2027. The state of Virginia is considering an option to meet the needs for more roads and schools. The option is building toll roads financed by sales tax now and building more schools in 2027 which will be financed by revenue from toll roads.

Information:

Toll road building costs

2018: $25 million

2019: $25 million

2020: $20 million

Annual expected number of toll road users/vehicles per day: 22,000 from 2021.

User charge = $3.00

Annual expected cost of new road constructions and repairs is $5 million from 2021.

Required school investment in 2027: $60 million (in 2018 $).

a. First, find out a discount rate that you believe is appropriate for your analysis and explain how you came up with the discount rate you selected. Any reference(s)?

b. Will the project of building toll roads bring enough financial resource for school investment in 2027? If not, calculate the user charge (toll charge) that will bring enough financial resources for school investment in 2027.

Answer 1

	Year	Cost/Revenue (Milliion)	Annual ExPenses( Maintenance)	Net Expense/ Revenue	Discount Factor @7%	Discounted Value
Question	2018	-25		-25	0.9346	-23.3645
	2019	-25		-25	0.8734	-21.8360
	2020	-20		-20	0.8163	-16.3260
	2021	24.09	-5	19.09	0.7629	18.3781
	2022	24.09	-5	19.09	0.7130	17.1758
	2023	24.09	-5	19.09	0.6663	16.0522
	2024	24.09	-5	19.09	0.6227	15.0020
	2025	24.09	-5	19.09	0.5820	14.0206
	2026	24.09	-5	19.09	0.5439	13.1034
	2027	24.09	-5	19.09	0.5083	12.2461
	Net			63.63		44.4519
	Note:-earning per annum is 365 days*$3 per vehicle*22000 no of vehicles
	(a) Discount factor is taken at the expectancy of the growth by the investor in the particular industry.
	It is assumed 7% in the general growth expectancy in any country which can vary country to country.
	(b) AS the net earning is 63.63 million $ more than 60 millionn $, therefore the earning $ 3 per vehicle is sufficient.