Name Problem 4 (15 pts) The State of Arkansas is considering a S770 million cons
ID: 2800077 • Letter: N
Question
Name Problem 4 (15 pts) The State of Arkansas is considering a S770 million construction project to widen 1-40 between Memphis and Little Rock to 3 lanes in each direction in order to alleviate congestion. At present, 44,000 vehicles per day use that road and the average cost of delay due to congestion is estimated at S6 per vehicle per day. The new lanes will eliminate this burden. O&M; costs for the added lanes will be S10 million per year and every 15 years, the road will have to be resurfaced at a cost of S110 million. Use B/C analysis to determine whether or not this project is financially justified. Assume the cost of capital is 4% per year and the project will last indefinitely.Explanation / Answer
benefits for 1 car=6/(1+4%/365)+6/(1+4%/365)^2........=6*365/4%=54750
benefits for 44000 cars=44000*54750=2409 million
costs=770+10/4%+110/(1+4%)^15*1/((1+4%)^15-1)=1096.2589 million
Hence, B/C=2409/1096.2589=2.197
As B/C is more than 1, the project should be accpeted because it is financially justified
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