Question

You are trying to decide whether to bid on a construction contract for a new bridge in South Carolina. You think that it will take 36 months to build and that construction costs will be $2 million per month. You expect tolls to be $10 million per year once the bridge opens, which will be offset by toll collection and maintenance costs of $2 million per year. Your (minimally acceptable rate of return) MARR is 15% per year. To bid on the project, you specify the price you are willing to pay to the state (in cash, at time 0) for the right to build the bridge and operate it for a period of 30 years. At the end of 30 years, the ownership and operation of the bridge revert to the state of South Carolina.

a. You can obtain a construction line of credit at 10% per year that can be used to cover all the construction expenses plus all of the accrued interest. What will be the outstanding balance when the bridge is completed?

b. Once the bridge is open, you will have a steady stream of income, so that you can refinance the construction loan at a lower interest rate, say 8% per year, and pay off the loan in 30 years. What will the annual payments be on this loan?

c. What is the cash flow (toll revenue minus payments on your loan) from operating the bridge worth to you at the end of month 30 when the bridge opens?

d. What are you willing to bid for the bridge?

Answer 1

Please find below table useful to compute desired results: -

End results would be as follows: -