1. Question Three Nowhereton is a coastal town with a small population, mostly known for being home to the now almost extinct seven ngered Deliciosa Treefrog. Other than by sea, the only way of accessing the town is via a rough dirt road off a main expressway. Recently the local council has been considering making the town more accessible by improving the condition of the road. In the past two years, there have been several instances where critically ill or injured residents have had to be airlifted out of the town because driving out was not viable. Other likely benets from having a better road include higher land values, greater potential for revenue from tourism related activities, and convenience for residents who may have to leave town for things such as supplies or routine medical treatment. However, one major drawback would be the increased likelihood of damage to the environment and native wildlife due to a larger tourist population and more movement throughout the area. The following nancial information has been provided to the council in order to help with the decision. While the road itself would last many years, the council has decided to analyse the costs over a 5-year time horizon and apply its usual hurdle rate of 12% for capital expenditure projects. The tax rate is 30% (we're going to assume the council pays taxl). $ Cost of clearing land 100,000 Cost of levelling the ground 30,000 Cost of tarring the new road 10,000 Cost of sealing the road 10,000 Cost of lighting and signage 60,000 Annual maintenance cost of road 12,000 Annual revenue from road tolls 35,000 *Note: costs of developing the road are one-off in nature and will not be depreciated. The council calculated the net present value of the proposed road project as follows: $ Revenue from road tolls 35,000 Less maintenance cost of road 12,000 Pre-tax annual incremental benets 33,000 Tax @ 30% 9,900 After-tax annual incremental benets 23,100 Present value of after-tax annual incremental benets (@ 3.6048) 83,270.88 Less Initial investment 210,000 NPV of the project -1 26,729.12 Required: Should the council reject the road project based on the negative NPV? Discuss two (2) potential issues with the council using NPV to make a decision about this road into Nowhereton. Present Value Tables: PRESENT VALUE OF $1.00 Present value of $1.00 Periods 2% 4% 5% 8% 10% 12% 14% 16% 18% 20% 24% 26% 28% 30% 32% 40% Periods 0.9804 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 0.8065 0.7937 0.7813 0.7692 0.7576 0.7143 N 0.9612 0.9246 0.8900 0.8573 0.8264 0.7972 0.7695 0.7432 0.7182 0.6944 0.6504 0.6299 0.6104 0.5917 0.5739 0.5102 N 0.9423 0.8890 0.8396 0.7938 0.7513 0.7118 0.6750 0.6407 0.6086 0.5787 0.5245 0.4999 0.4768 0.4552 0.4348 0.3644 0.9238 0.8548 0.7921 0.7350 0.6830 0.6355 0.5921 0.5523 0.5158 0.4823 0.4230 0.3968 0.3725 0.3501 0.3294 0.2603 A 0.9057 0.8219 0.7473 0.6806 0.6209 0.5674 0.5194 0.4761 0.4371 0.4019 0.3411 0.3149 0.2910 0.2693 0.2495 0.1859 0.8880 0.7903 0.7050 0.6302 0.5645 0.5066 0.4556 0.4104 0.3704 0.3349 0.2751 0.2499 0.2274 0.2072 0.1890 0.1328 0.8706 0.7599 0.6651 0.5835 0.5132 0.4523 0.3996 0.3538 0.3139 0.2791 0.2218 0.1983 0.1776 0.1594 0.1432 0.0949 0.8535 0.7307 0.6274 0.5403 0.4665 0.4039 0.3506 0.3050 0.2660 0.2326 0.1789 0.1574 0.1388 0.1226 0.1085 0.0678 Co 0.8368 0.7026 0.5919 0.5002 0.4241 0.3606 0.3075 0.2630 0.2255 0.1938 0.1443 0.1249 0.1084 0.0943 0.0822 0.0484 CO 10 0.8203 0.6756 0.5584 0.4632 0.3855 0.3220 0.2697 0.2267 0.1911 0.1615 0.1164 0.0992 0.0847 0.0725 0.0623 0.0346 10 11 0.8043 0.6496 0.5268 0.4289 0.3505 0.2875 0.2366 0.1954 0.1619 0.1346 0.0938 0.0787 0.0662 0.0558 0.0472 0.0247 11 12 0.7885 0.6246 0.4970 0.3971 0.3186 0.2567 0.2076 0.1685 0.1372 0.1122 0.0757 0.0625 0.0517 0.0429 0.0357 0.0176 12 13 0.7730 0.6006 0.4688 0.3677 0.2897 0.2292 0.1821 0.1452 0.1163 0.0935 0.0610 0.0496 0.0404 0.0330 0.0271 0.0126 13 14 0.7579 0.5775 0.4423 0.3405 0.2633 0.2046 0.1597 0.1252 0.0985 0.0779 0.0492 0.0393 0.0316 0.0254 0.0205 0.0090 14 15 0.7430 0.5553 0.4173 0.3152 0.2394 0.1827 0.1401 0.1079 0.0835 0.0649 0.0397 0.0312 0.0247 0.0195 0.0155 0.0064 15 16 0.7284 0.5339 0.3936 0.2919 0.2176 0.1631 0.1229 0.0930 0.0708 0.0541 0.0320 0.0248 0.0193 0.0150 0.0118 0.0046 16 17 0.7142 0.5134 0.3714 0.2703 0.1978 0.1456 0.1078 0.0802 0.0600 0.0451 0.0258 0.0197 0.0150 0.0116 0.0089 0.0033 17 18 0.7002 0.4936 0.3503 0.2502 0.1799 0.1300 0.0946 0.0691 0.0508 0.0376 0.0208 0.0156 0.0118 0.0089 0.0068 0.0023 18 19 0.6864 0.4746 0.3305 0.2317 0.1635 0.1161 0.0829 0.0596 0.0431 0.0313 0.0168 0.0124 0.0092 0.0068 0.0051 0.0017 19 20 0.6730 0.4564 0.3118 0.2145 0.1486 0.1037 0.0728 0.0514 0.0365 0.0261 0.0135 0.0098 0.0072 0.0053 0.0039 0.0012 20 21 0.6598 0.4388 0.2942 0.1987 0.1351 0.0926 0.0638 0.0443 0.0309 0.0217 0.0109 0.0078 0.0056 0.0040 0.0029 0.0009 21 22 0.6468 0.4220 0.2775 0.1839 0.1228 0.0826 0.0560 0.0382 0.0262 0.0181 0.0088 0.0062 0.0044 0.0031 0.0022 0.0006 22 23 0.6342 0.4057 0.2618 0.1703 0.1117 0.0738 0.0491 0.0329 0.0222 0.0151 0.0071 0.0049 0.0034 0.0024 0.0017 0.0004 23 24 0.6217 0.3901 0.2470 0.1577 0.1015 0.0659 0.0431 0.0284 0.0188 0.0126 0.0057 0.0039 0.0027 0.0018 0.0013 0.0003 24 25 0.6095 0.3751 0.2330 0.1460 0.0923 0.0588 0.0378 0.0245 0.0160 0.0105 0.0046 0.0031 0.0021 0.0014 0.0010 0.0002 25 26 0.5976 0.3607 0.2198 0.1352 0.0839 0.0525 0.0331 0.0211 0.0135 0.0087 0.0037 0.0025 0.0016 0.0011 0.0007 0.0002 26 27 0.5859 0.3468 0.2074 0.1252 0.0763 0.0469 0.0291 0.0182 0.0115 0.0073 0.0030 0.0019 0.0013 0.0008 0.0006 0.0001 27 28 0.5744 0.3335 0.1956 0.1159 0.0693 0.0419 0.0255 0.0157 0.0097 0.0061 0.0024 0.0015 0.0010 0.0006 0.0004 0.0001 28 29 0.5631 0.3207 0.1846 0.1073 0.0630 0.0374 0.0224 0.0135 0.0082 0.0051 0.0020 0.0012 0.0008 0.0005 0.0003 0.0001 29 30 0.5521 0.3083 0.1741 0.0994 0.0573 0.0334 0.0196 0.0116 0.0070 0.0042 0.0016 0.0010 0.0006 0.0004 0.0002 0.0000 30 35 0.5000 0.2534 0.1301 0.0676 0.0356 0.0189 0.0102 0.0055 0.0030 0.0017 0.0005 0.0003 0.0002 0.0001 0.0001 0.0000 35 40 0.4529 0.2083 0.0972 0.0460 0.0221 0.0107 0.0053 0.0026 0.0013 0.0007 0.0002 0.0001 0.0001 0.0000 0.0000 0.0000 40Present Value Tables: PRESENT VALUE OF AN NUNITY OF $1.00 Present value of annuity of $1.00 4% 6% 3% 10% 12% 14% 16% 13% 20% 24% 26% 23% 30% 32% 40% Periods 1 0.9304 0.9615 0.9434 0.9259 0.9091 0.3929 0.3772 0.3621 0.3475 0.3333 0.7313 0.7692 0.7576 0.7143 1 2 1.9416 1.3361 1.3334 1.7333 1.7355 1.6901 1.6467 1.6052 1.5656 1.5273 1.3916 1.3609 1.3315 1.2245 2 3 2.3339 2.7751 2.6730 2.5771 2.4369 2.4013 2.3216 2.2459 2.1743 2.1065 1.3634 1.3161 1.7663 1.5339 3 4 3.3077 3.6299 3.4651 3.3121 3.1699 3.0373 2.9137 2.7932 2.6901 2.5337 2.2410 2.1662 2.0957 1.3492 4 5 4.7135 4.4513 4.2124 3.9927 3.7903 3.6043 3.4331 3.2743 3.1272 2.9906 2.5320 2.4356 2.3452 2.0352 5 6 5.6014 5.2421 4.9173 4.6229 4.3553 4.1114 3.3337 3.6347 3.4976 3.3255 2.7594 2.6427 2.5342 2.1630 6 7 6.4720 6.0021 5.5324 5.2064 4.3634 4.5633 4.2333 4.0336 3.3115 3.6046 2.9370 2.3021 2.6775 2.2623 7 3 7.3255 6.7327 6.2093 5.7466 5.3349 4.9676 4.6339 4.3436 4.0776 3.3372 3.0753 2.9247 2.7360 2.3306 3 9 3.1622 7.4353 6.3017 6.2469 5.7590 5.3232 4.9464 4.6065 4.3030 4.0310 3.1342 3.0190 2.3631 2.3790 9 10 3.9326 3.1109 7.3601 6.7101 6.1446 5.6502 5.2161 4.3332 4.4941 4.1925 3.2639 3.0915 2.9304 2.4136 10 11 9.7363 3.7605 7.3369 7.1390 6.4951 5.9377 5.4527 5.0236 4.6560 4.3271 3.3351 3.1473 2.9776 2.4333 11 12 10.5753 9.3351 3.3333 7.5361 6.3137 6.1944 5.6603 5.1971 4.7932 4.4392 3.3363 3.1903 3.0133 2.4559 12 13 11.3434 9.9356 3.3527 7.9033 7.1034 6.4235 5.3424 5.3423 4.9095 4.5327 3.4272 3.2233 3.0404 2.4635 13 14 12.1062 10.5631 9.2950 3.2442 7.3667 6.6232 6.0021 5.4675 5.0031 4.6106 3.4537 3.2437 3.0609 2.4775 14 15 12.3493 11.1134 9.7122 3.5595 7.6061 6.3109 6.1422 5.5755 5.0916 4.6755 3.4334 3.2632 3.0764 2.4339 15 16 13.5777 11.6523 10.1059 3.3514 7.3237 6.9740 6.2651 5.6635 5.1624 4.7296 3.5026 3.2332 3.0332 2.4335 16 17 14.2919 12.1657 10.4773 9.1216 3.0216 7.1196 6.3729 5.7437 5.2223 4.7746 3.5177 3.2943 3.0971 2.4913 17 13 14.9920 12.6593 10.3276 9.3719 3.2014 7.2497 6.4674 5.3173 5.2732 4.3122 3.5294 3.3037 3.1039 2.4941 13 19 15.6735 13.1339 11.1531 9.6036 3.3649 7.3653 6.5504 5.3775 5.3162 4.3435 3.5336 3.3105 3.1090 2.4953 19 20 16.3514 13.5903 11.4699 9.3131 3.5136 7.4694 6.6231 5.9233 5.3527 4.3696 3.5453 3.3153 3.1129 2.4970 20 21 17.0112 14.0292 11.7641 10.0163 3.6437 7.5620 6.6370 5.9731 5.3337 4.3913 3.5514 3.3193 3.1153 2.4979 21 22 17.6530 14.4511 12.0416 10.2007 3.7715 7.6446 6.7429 6.0113 5.4099 4.9094 3.5553 3.3230 3.1130 2.4935 22 23 13.2922 14.3563 12.3034 10.3711 3.3332 7.7134 6.7921 6.0442 5.4321 4.9245 3.5592 3.3254 3.1197 2.4939 23 24 13.9139 15.2470 12.5504 10.5233 3.9347 7.7343 6.3351 6.0726 5.4509 4.9371 3.5619 3.3272 3.1210 2.4992 24 25 19.5235 15.6221 12.7334 10.6743 9.0770 7.3431 6.3729 6.0971 5.4669 4.9476 3.5640 3.3236 3.1220 2.4994 25 26 20.1210 15.9323 13.0032 10.3100 9.1609 7.3957 6.9061 6.1132 5.4304 4.9563 3.5656 3.3297 3.1227 2.4996 26 27 20.7069 16.3296 13.2105 10.9352 9.2372 7.9426 6.9352 6.1364 5.4919 4.9636 3.5669 3.3305 3.1233 2.4997 27 23 21.2313 16.6631 13.4062 11.0511 9.3066 7.9344 6.9607 6.1520 5.5016 4.9697 3.5679 3.3312 3.1237 2.4993 23 29 21.3444 16.9337 13.5907 11.1534 9.3696 3.0213 6.9330 6.1656 5.5093 4.9747 3.5637 3.3317 3.1240 2.4999 29 30 22.3965 17.2920 13.7643 11.2573 9.4269 3.0552 7.0027 6.1772 5.5163 4.9739 3.5693 3.3321 3.1242 2.4999 30 35 24.9936 13.6646 14.4932 11.6546 9.6442 3.1755 7.0700 6.2153 5.5336 4.9915 3.5703 3.3330 3.1243 2.5000 35 40 27.3555 19.7923 15.0463 11.9246 9.7791 3.2433 7.1050 6.2335 5.5432 4.9966 3.5712 3.3332 3.1250 2.5000 40