FNCE 3000, Group Project 2 The United Nations has decided that it would be nice to construct a tunnel across the Bering Strait to connect Russia to Alaska, allowing for a road trip across the world and thereby promoting a global sense of greater understanding, unity, and peace. To this end, the UN has solicited your firm to build this tunnel. If you build the tunnel, you will receive $20 for each car that passes through the tunnel. Upon hearing this, you hired a team of consultants, at a cost of $100,000, to help you analyze the scope, costs, and overall operations/infrastructure associated with this project. Their complete report/analysis is attached on the following page. Question: Should you accept this project? Provide a full report/analysis along with your ultimate valuation of this project. I'd like to see a full cash-flow timeline, detailing the accounting information each period (like how we did in class), so that I can follow how you derive your final cash flows, and ultimately, your final decision. State capitals Bering Strait ARCTIC Barrow 0 250 mi Cities RUSSIA OCEAN Prvahoe 0 400 km Point Hope By Beaufort Sea Nosta Kotzebwe BROOKS RANGE Sound Bering Stra WARD Kotzebue Koyutut ENINSULA Nome Fort Yukon ST. LAWRENCES Norton Galena Yuko Sound Fairbanks KUSKOKWIM Tanans ST. MATTHEW Hooper Bay Yukon MTS CANADA ME Mckinley 6194 m ATTU ALASKA RANGE Attu Bering AGATTUI. Sea Valdez St. Paul KERA Mit St Els PRIBILOF Dillingham PENINSULA Seward 5489 KISKA 15. Bristol KLEUTUN Eook Inlet William Skagy A LEUTIAN is. Bay "RANGE Sound AMCHITKAI Shishaldin ALASKA Kodiak Sneau Volcano PENINSULA ADAK Gulf of Alaska KODLAKI 2857 King Cove SH ATKAL ALEXANDER DutchUNALASKAL ARCHIPELAGO Harbor Ketch PACIFIC OCEAN 1994 Encyclopaedia Britannica, Inc NUMIVAX Bethel Anchor UMMA Report from Team of Tunnel Consultants: Overall, it should take three years to complete construction of the tunnel. The project would require the upfront purchase (t=0) of a $100 million Blade Digger, a huge machine to drill the tunnel. The Blade Digger has a useful life of five years, and can be depreciated at a rate of $20M/year. Based on our analyses, we anticipate that, at any point in time, The Blade Digger can be sold at book value. We expect annual construction expenses of $50M / year for 3 years (from t=1, 2, 3) and annual maintenance expenses of $25M / year throughout the 30-year life of the tunnel, with maintenance expenses to be paid beginning at time t=4. We expect that the tunnel has no salvage value at the end of its useful life. The NWC requirement during the construction phase of this project is $15M (from t=0, 1, 2). We anticipate a $5M NWC requirement from t=3 and on. We estimate that, throughout life of tunnel, about 3.5 million vehicles will use the tunnel per year. Your relevant marginal tax rate is 35%, and based on the risks involved, the opportunity cost of capital is assessed to be 15%. Be sure to include all of your names on the first page of your homework submission. Please make sure that the final work-product is in a printable format
