Buzz Light Rail, BLR provides mass transportation from various places in a large city, Electric Town. BLR is a private entity that operates and maintains the light rail system under a long-term contract with Electric Town, ET. BLR receives a flat fee of $1 million to maintain and operate the light rail system. Thus, any cost savings will increase BLRs ROR.

An aging traffic management system combined with increasing demand for public transportation has forced BLR to consider upgrading its light rail system. Internal research conducted by BLRs engineering team indicates that some of the greatest cost savings would likely be from improving the efficiency of the rail system through better traffic management. The engineering folks are of the opinion that current bottlenecks created by mismanaged traffic flow are generating an increasing cost burden on the LR system. Therefore, BLRs engineering folks propose to replace the existing traffic management system.

Two systems are under consideration A and B. System information and associated costs are listed in Exhibit 1.

	System A	System B	System B Mod
Initial Investment, $	2500000	3500000	4500000
Useful Life, N	20	20	25
Salvage at N, $	500000	900000	300000
AE at EOY 5, $	180000	0	0
AE at EOY 10, $	300000	50000	0
AE increases, $/yr. Starting EOY 6	30000	0	0
AE increases, $/yr. Starting EOY 10		5000	0
AR	625000	625000	625000
Upgrade at EOY 10, $	1000000	0	0
Upgrade at EOY 15, $	0	600000	0
MARR	14%	14%	14%

Exhibit 1: Basic Cost Information for the candidate systems.

Useful Life, N

The useful life (N = 20) of both systems is set to the expiration of the current contact with Electric Town authorities. It can be extended provided the systems is upgraded and/or a timely request to extend the current contract is made.

Annual Revenues, AR

Annual revenues represent a uniform amount that is paid to BLR by Electric City. The current contract has Electric Town paying BLR $1M for the maintenance and operation of the light rail system. The AR value of 625K is a result of the effect of other costs associated with the current contract. The 375K in costs are not considered part of this study.

Annual Expenses, AE

The annual expenses, AE for A are zero until EOY 5. At that time, they grow to 180K increasing by 30K per year starting in EOY 6 until the system is upgraded for $1M at EOY 10. Then the AE for A resets to zero for the next 5 years (EOY 11). The AE returns to the EOY 5 values (180K) beginning at EOY 16. They increase at the same rate as in years EOY 6 to 10 for EOY 17 to 20.

AE for B are zero for the until EOY 10 due to warranty and reliability. Beginning at EOY 10 the AE increases to 50K. These annual expenses increase by 5K per year starting in EOY 11 until the upgrade year of EOY 15. At EOY 16 the AE for system B returns to 0 until EOY 20.

System B Modified

The vendor for system B strongly wishes to partner with BLR. The hope is to use the experience to attract other customers. Consequently, the vendor of offers BLR the following plan. It is a modified plan. See Exhibit 1 for the details. In summary, the plan asks for BLR to initially invest 4.1M. In exchange for the higher upfront cost the vendor will absorb any future AE relating to this system. Incorporating the higher initial investment will also allow BLR eliminate the 600K upgrade at EOY 15. In addition, the higher initial investment will extend the useful life of the system another 5 years. Although the market value of B will decrease to 300K, BLR is confident that Electric Town managers will extend the contract the 5 years.

Additional Notes

This economic study by BLR is evaluating an entirely new system to replace the existing system.

No consideration is given for the current market value, MV₀ of the existing system.

The initial capital investment includes installation and training.

The vendor of A system has missed the proposal modification deadline therefore the current System A proposal stands without modification.

Upgrades are financed as capital expenses.

Focus Questions and Deliverables

Based on PW, which of the two choices A or B is economically better. (Ignore B Mod in this step.

Be sure to explicitly state why either A or B was chosen.

Create a cash flow diagram, CFD for the choice made in question 1.

Calculate the ROR for which BLR would be indifferent between A and B. (Use the PW analysis for question 1 as a basis.)

Create a graphic display illustrating ROR v. PW of A and B on the same graph.

Indicate the value calculated as part of question 3.

Be sure to explain what this ROR means for the economic analysis.

Calculate the capital recovery, CR for all 3 options.

Can BLR fully recover its invested capital? (Upgrades are financed as capital expenses.)

Economically evaluate the proposed B Mod. Is it economically justified?

Compare these results with the results of question 1. Which option is the better economic choice?

Be sure to state why.

BLR is interested in the B Mod option. Some of the decision makers think that if the vendor of B Mod could adjust their initial cost such that there is no economic difference between the A and B Mod options, the B Mod may be the less risky choice. What would the initial cost of the B Mod option have to be for it to be economically equivalent to the A option?

Train Control and Signals Communications-based train control (CBTC) is undergoing field trials. Todays prototype installations will lead to wider application of CBTC on LRT systems in coming years. Intelligent transportation systems will be prominent with features such as warning devices for at-grade crossings, managing LRT control center operations, and providing on-street traffic signal priority. Communications Quantum leaps in computers and fiber-optic data transmission technologies will continue to reduce costs and expand the amount of management information available to LRT operators. Automated, real-time train location will be common for LRT systems. All major LRT stations will have real-time train arrival information to enhance the customers use of the system.

Does not need to be in format, I just need the answers to the focus questions and deliverables section.