Question
In: Economics
A highway construction company is under contract to build a new roadway through a scenic area...
A highway construction company is under contract to build a new roadway through a scenic area and two rural towns in Colorado. The road is expected to cost $18,000,000, with annual upkeep estimated at $150,000 per year. Additional income from tourist (Benefits) of $900,000 per year is estimated. The road is expected to have a useful commercial life of 20 years. Determine if the highway should be constructed at a discount rate of 6% per year, applying the Conventional B/C method . Remember to state your decision (Build or don’t build).
Solutions
Expert Solution
Annual Worth of the costs = P(A/P, i, n) + A
= 18,000,000(A/P, 6%, 20) + 150,000
= 18,000,000(0.0872) + 150,000
= 1,569,600 + 150,000
= $1,719,600
Annual Worth of the benefits = $900,000
B/C ratio = Annual Worth of the benefits / Annual Worth of the costs
= $900,000 / $1,719,600
= 0.52
Since B/C ratio is less than 1, therefore, the company do not build the new roadway.
Rahul Sunny answered 1 year agoRelated Solutions
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