Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help find the answer using excel and what formulas are used Suppose that you are again working for your state government but that instead

Please help find the answer using excel and what formulas are used

Suppose that you are again working for your state government but that instead of working on health and human services issues, you are running the highway department. Your state turnpike is in poor shape, with large potholes and crumbling shoulders that slow down traffic and pose an accident risk. You have been charged by the governor with the task of considering whether the state should invest in repairing this road assuming it will last for 100 years.

The data for the project is indicated in the Table below. Note that all values are in nominal dollar terms (actual market values)

Benefit and Cost:

Making improvements will require the following inputs:

  1. Initial cost: 1 million bags of asphalt, $100/bag;
  2. Initial cost: 1 million hours of construction labor (500 workers for 2,000 hours each), at $20/hour
  3. $10 million per year in the future for maintenance costs

There are two main benefits to these road improvements:

  1. Driving time for producers (trucks) and consumers will be reduced by 500,000 hours per year. Hourly value is $19/hour.
  2. The road will be safer, resulting in five fewer fatalities per year. The estimated life value (using wages) is $8.7 million/life.

Question 1: What is the net present value of the investment at 5%, 7%, and 10%? Should the project be undertaken?

Question 2: Now assume that the maintenance cost is increasing at the rate of 5% per year in nominal terms. Hourly value of the reduced driving time is rising at 2% per year in nominal terms. Life values increase by 1% per year in nominal terms. The inflation rate is 2% per annum. All annual values accrue at the end of each year. Assume the nominal discount rate is 7%.

  1. What is the real discount rate?
  2. What is the Net Annual Worth (annualized net benefit) of this project?
  3. What is the net present value? Should the project be undertaken?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Theory And Practice Of Australian Auditing

Authors: Schelluch Gul, Teoh, Andrew

1st Edition

0170092445, 978-0170092449

More Books

Students also viewed these Accounting questions

Question

3. Explain the forces that influence how people handle conflict

Answered: 1 week ago