8. Suppose that there are 100,000 people with identical Prefe 4 Re-do trip and given the speed of the train, they would stop preferences. Each person rides the train to work at a price of $10 per that costs $8 per trip. Taking the bus increases the trip be pre higher. The alternative to the train is to take a bus higher-speed train that is 60 ging bus increases the trip by 60 minutes. The city is considering upgrading the train to a - There would be an initial investment of $400 million a paid immediately and an additional $100 million investment due at the end of the first year. - The price to ride the new higher-speed train will be set at $12.50 per trip, which is needed to cover new operating costs of the trains. - Each person makes 1,000 trips per year and the proposed upgraded train would be ready at the end of two years from now. - There will be no disruption in the old train service during the two years of construction of the new high-speed train service. - The opportunity cost for this project is 5%. A. (Worth 4 exam points) What is the net present value of the train project? (You must show your work) B. (Worth 4 exam points) Based on your analysis is it admissible for the city to go forward with the train project (why)? C. (Worth 4 exam points) If it is later suspected that the discount rate may be either 3% or 7% what would you do to see if this project is admissible now (just tell me what you would do...you don't have to re-calculate anything in this part)? 8. Suppose that there are 100,000 people with identical Prefe 4 Re-do trip and given the speed of the train, they would stop preferences. Each person rides the train to work at a price of $10 per that costs $8 per trip. Taking the bus increases the trip be pre higher. The alternative to the train is to take a bus higher-speed train that is 60 ging bus increases the trip by 60 minutes. The city is considering upgrading the train to a - There would be an initial investment of $400 million a paid immediately and an additional $100 million investment due at the end of the first year. - The price to ride the new higher-speed train will be set at $12.50 per trip, which is needed to cover new operating costs of the trains. - Each person makes 1,000 trips per year and the proposed upgraded train would be ready at the end of two years from now. - There will be no disruption in the old train service during the two years of construction of the new high-speed train service. - The opportunity cost for this project is 5%. A. (Worth 4 exam points) What is the net present value of the train project? (You must show your work) B. (Worth 4 exam points) Based on your analysis is it admissible for the city to go forward with the train project (why)? C. (Worth 4 exam points) If it is later suspected that the discount rate may be either 3% or 7% what would you do to see if this project is admissible now (just tell me what you would do...you don't have to re-calculate anything in this part)
