Problem 1 (40 points)

A city is interested in reducing traffic and improving the commuting times of people in the downtown area, with aims to help boost the local economy. Three different projects are being currently evaluated, and only one will be implemented:

Project 1

To build a metro system, the city needs to purchase multiple pieces of land next to main highways, at a cost of $19000,0000. The construction costs are estimated to be $23000,000 and this phase would take a time lapse of 2 years. During this construction time, the local businesses in the area will suffer from low accessibility, which will cause a decreased flow of customers, translating into revenue losses of $16500,000 per year for the local businesses in the district. After the Metro-System is built, the affected businesses will return to normal operations and additionally have a boost of $4,500,000 of extra annual revenue due to an increased affluence of customers in the district. The renting prices of housing apartments located in buildings in the sector will most likely increase after the Metro-System is built, conducing to an estimated increase of annual revenue of $5500,000 for the private housing renting sector in the district. The Metro-System will directly contribute with $2000,000 per year of extra revenue for the government, based on ticketing income and already discounting the expected yearly maintenance costs of the Metro-System, salary of drivers, security guards and other expenses.

Project 2:

To build a new elevated highway, the city needs to purchase minimal pieces of land, since it will be mostly located above already existing highways. The cost of land purchases will be $1,350,000. The construction phase will cost $8000,000 and is estimated to elapse for 3 years. During this time, some local business will suffer from low accessibility, which will result in a decrease of revenue of $6,500,000 for the local businesses. No other negative impact is estimated at that time. When the elevated highway is finished, there will be an increase in traffic-flow resulting in the business of the district receiving an estimated increase of $30,000 in annual revenues. Additionally, the Central Hospital of the City will get a clear access to this highway, which will improve the reaction time for ambulances. The improved efficiency of the emergency department of this hospital, will translate to an increase in annual revenues of $4650,000, since more clients will prefer to go to this hospital in case of emergency. People might wonder why this hospital was selected for access to highway, and no the other hospitals.

Project 3:

To build round-abouts, the city needs to purchase small pieces of land, which are rather expensive since they are located in very active corners in the downtown area. Land purchases

are estimated for $36000,000. The construction will be relatively fast and simple, accounting for $2000,000 and elapsing a period of 11 months only. This means that the benefits will begin to be observable starting next year. During the construction phase the local businesses will suffer from low accessibility estimated for a total of $350,000 losses during this 11 months. The expected benefit of the multiple round-abouts is the increased flow of traffic, which will translate into increased revenues for the local business for $3500,000 per year. The local police station will have a better response time due to the local improved traffic, thus causing an increase in the populations feeling of safety in the area. This local sentiment of safety has been estimated to cause an increase in people visiting local parks and museums. The increment in those activities are estimated to represent an extra $1700,000 per year to local small business and entrepreneurs such as food trucks and other services in parks, and an extra $350,000 revenue per year for the museums.

Using a MARR=15% and a planning horizon of 28 years, please answer the following questions:

b. Which project is the most expensive? Explain in your own words. (10 points)