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 below.

Question: Should you accept this project? Provide a full report/analysis along with your ultimate valuation of this project, including a full cash-flow timeline, detailing the accounting information each period, so as to determine how to derive the final cash flows, and ultimately, the final decision.

Report/Analysis:

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 the life of the 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%.