\"The City of Boston is considering adding new buses for its current mass-transi

Question

"The City of Boston is considering adding new buses for its current mass-transit system that links from the Hartsfield International Airport to major city destinations on a nonstop basis. The total investment package is worth $9 million and expected to last 9 years with a $830,000 salvage value. The annual operating and maintenance costs for buses would be $1.6 million during the first year, and will grow by 4% each year over the previous year thereafter. If the system is used for 670,000 trips per year, what would be the fair price to charge per trip to have a profitability index of 1? Assume that the City of Boston uses a 3% interest rate for city-sponsored projects. Hint: refer to the present worth formula for a geometric gradient to calculate the present worth of annual costs."

Explanation / Answer

Solution:

Capital cost

CR (3%) = ($9,000,000 - $830,000)(A/P, 3%, 9) + 0.03 ($830,000)

=$1,074,205

Equivalent annual O&M cost = $1,600,000

Total annual equivalent cost

AEC (3%) = $1,600,000 + $1,074,205 = $2,674,205

Cost per trip = $2,674,205/670,000 = $3.99135/trip  

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