Question
In: Civil Engineering
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
ANS:
We know Benefit cost ratio = B/C = Benefits/cost
If B/C > 1.0 then the project is advantageous.
Here,
| HIGHWAY PROJECT: | ||||||||
| SL.NO. | PROJECT | COSTS | DISCOUNT | TOTAL COST-1s.yr | BENEFITS (SAVINGS) | |||
| INVESTMENT | O&M/YR | 6% | P.YR. | |||||
| 1 |
State highway Project |
$ 18,000,000 | $ 150,000 | $ 1,089,000 | $ 19,239,000 | $ 900,000 | ||
| YEARS | |||||||||||||||||||||
| CASHFLOW | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | |
| HIGH WAY PROJECT | INFLOW | $ 900,000 | $ 954,000 | $ 1,011,240 | $ 1,071,914 | $ 1,136,229 | $ 1,204,403 | $ 1,276,667 | $ 1,353,267 | $ 1,434,463 | $ 1,520,531 | $ 1,611,763 | $ 1,708,469 | $ 1,810,977 | $ 1,919,635 | $ 2,034,814 | $ 2,156,902 | $ 2,286,317 | $ 2,423,496 | $ 2,568,905 | $ 2,723,040 |
| CUMULATIVE INFLOW | $ 900,000 | $ 1,854,000 | $ 2,865,240 | $ 3,937,154 | $ 5,073,384 | $ 6,277,787 | $ 7,554,454 | $ 8,907,721 | $ 10,342,184 | $ 11,862,715 | $ 13,474,478 | $ 15,182,947 | $ 16,993,924 | $ 18,913,559 | $ 20,948,373 | $ 23,105,275 | $ 25,391,592 | $ 27,815,087 | $ 30,383,993 | $ 33,107,032 | |
| OUTFLOW | $ 19,239,000 | $ 1,304,340 | $ 1,382,600 | $ 1,465,556 | $ 1,553,490 | $ 1,646,699 | $ 1,745,501 | $ 1,850,231 | $ 1,961,245 | $ 2,078,920 | $ 2,203,655 | $ 2,335,874 | $ 2,476,027 | $ 2,624,588 | $ 2,782,064 | $ 2,948,987 | $ 3,125,927 | $ 3,313,482 | $ 3,512,291 | $ 3,723,029 | |
| CUMULATIVE OUTFLOW | $ 19,239,000 | $ 20,543,340 | $ 21,925,940 | $ 23,391,497 | $ 24,944,987 | $ 26,591,686 | $ 28,337,187 | $ 30,187,418 | $ 32,148,663 | $ 34,227,583 | $ 36,431,238 | $ 38,767,112 | $ 41,243,139 | $ 43,867,727 | $ 46,649,791 | $ 49,598,779 | $ 52,724,705 | $ 56,038,188 | $ 59,550,479 | $ 63,273,508 | |
| NET CASHFLOW | $ (18,339,000) | $ (18,689,340) | $ (19,060,700) | $ (19,454,342) | $ (19,871,603) | $ (20,313,899) | $ (20,782,733) | $ (21,279,697) | $ (21,806,479) | $ (22,364,868) | $ (22,956,760) | $ (23,584,165) | $ (24,249,215) | $ (24,954,168) | $ (25,701,418) | $ (26,493,503) | $ (27,333,113) | $ (28,223,100) | $ (29,166,486) | $ (30,166,475) | |
| BCR = | 0.5232 | ||||||||||||||||||||
If B/C = 0.523 WHICH IS < 1.0, so this project will be disadvantageous.
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