Exercise 5-5 Macroeconomic net present value method A local transportation authority is considering the prolongation of a tramway in order to connect a new residential area to the local transportation system. Until now the area could be reached only very circuitously by a single accommodation road. These are the planned financial details:

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Construction costs € 20 Mio. A government grant of € 4 Mio. is expected. The economic life is supposed to be 30 years.

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Maintenance costs are € 0.2 Mio. per year.

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Revenues from the users of the new tramway € 0.5 Mio. per year.

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Saved costs for accidents: € 1 Mio. per year.

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Time saving, valued with € 0.6 Mio. per year.

a) First run a normal investment appraisal calculation from the project executing organisation's point of view. To reach this aim, use the net present value method at a 5 % discount rate. If necessary, round to whole Euros. All payments occur at the end of each year.

b) Then set up a macroeconomic net present value approach that incurs the project's external effects. Check if this changes the desirability of the tramway's prolongation.