Question
A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge.
A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge. The temporary bridge can be put up in a few weeks at a cost of $740,000. At the end of three years, it would be removed and the steel would be sold for scrap. The real net cost of this removal would be $81,000. Based on estimated time savings and wage rates, fuel savings, and reductions in risks of accidents, department analysts predict that the benefits in real dollars would be $275,000 during the first year, $295,000 during the second year, and $315,000 during the third year. Departmental regulations require use of a real discount rate of 5 percent.
a. Calculate the present value of net benefits assuming that the benefits are realized at the end of each of the three years.
b. Calculate the present value of net benefits assuming that the benefits are realized at the beginning of each of the three years.
c. Calculate the present value of net benefits assuming that the benefits are realized in the middle of each of the three years.
d. Does the temporary bridge pass the net benefits test?
e. Which method of discounting (a-c) would you reccommend?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started