Problem #7 (20 points) The City of Lake is undertaking a highway improvement pro

Question

Problem #7 (20 points) The City of Lake is undertaking a highway improvement project and needs a benefit-cost analysis performed including an incremental analysis. Use the following data relating to the three alternatives to determine the most acceptable alternative. The City of Lake uses an interest rate of 10% for evaluating its projects. Alternative 1 Alternative 2 Alternative 3 ($000) ($000)($000) $22,000 Construction Cost Annual Revenue Annual Maintenance Cost $2,000 3,500 $24,000 $7,500 $19,500 $7,000 $6,200 $1,800 Service Life 25 Years25 Years25 years

Explanation / Answer

Net inflow per year for Alt-1 = 7000-2000 = $5,000
Net inflow per year for Alt-2 = 7500-3500 = $4,000
Net inflow per year for Alt-3 = 6200-1800 = $4,400
We will then calculate the PVAF (Present value annuity factor) for this using the formula PV = [1-(1+r)^-n]/r

Applying this formula using the time (n) as 25 years and the rate (r) as 10%, we get:
Alt-1 = $45,385
Alt-2 = $36,308
Alt-3 = $39,939

By reducing the initial construction cost we get the NPV:
Alt-1 = $23,385
Alt-2 = $12,308
Alt-3 = $20,439

On the basis of this information alone, Alternative 1 can be recommended

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.