Question

A bridge is to be constructed as part of a new road. An analysis has shown...

A bridge is to be constructed as part of a new road. An analysis has shown that traffic density on the new road will justify a two-lane bridge at the present time. Because of uncertainty regarding future use of the road, the time at which an extra two lanes will be required is currently being studied. The estimated probabilities of having to widen the bridge to four lanes at various times in the future are as follows. The present estimated cost of the two-lane bridge is $2,000,000. If constructed now, the four-lane bridge will cost $3,450,000. The future cost of widening a two-lane bridge will be an extra $2,000,000 plus $250,000 for every year that widening is delayed. If money can earn 12% per year, perform an analysis to determine how sensitive the choice of a four-lane bridge built now versus a four-lane bridge that is constructed in two stages is to the interest rate. At what interest rate would constructing the two-lane bridge now be preferred?

a. widen bridge in 3 yrs, probability 0.1

b. widen bridge in 4 yrs, probability 0.2

c. widen bridge in 5 yrs, probability 0.3

d. widen bridge in 6 yrs, probability 0.4

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Argentina is considering constructing a bridge across the Rio de La Plata to connect its Northern...
Argentina is considering constructing a bridge across the Rio de La Plata to connect its Northern coast to the Southern coast of Uruguay. If this bridge is constructed, it will reduce the travel time from Buenos Aires, Argentina to Sao Paulo, Brazil by over 10 hours, and has the potential to significantly improve the flow of manufactures goods between the two countries. The cost of the new bridge, which will be longest bridge in the world and span over 50...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 16%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 170,000 Working capital needed $ 68,000 Overhaul of the equipment in year two $ 12,000 Salvage value of the equipment in four years $ 16,000 Annual revenues and costs: Sales revenues $...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 165,000 Working capital needed $ 67,000 Overhaul of the equipment in year two $ 10,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues $...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell...
Problem 13-18 Net Present Value Analysis [LO13-2] Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 17%. After careful study, Oakmont estimated the following costs and revenues for the new product: Cost of equipment needed $ 165,000 Working capital needed $ 67,000 Overhaul of the equipment in year two $ 10,000 Salvage value of the equipment in four years $ 13,000 Annual revenues and costs: Sales revenues $...
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has...
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:   A B Initial Investment 320,000 454,000 Annual Cash...
Differential Analysis for Machine Replacement Proposal Flint Tooling Company is considering replacing a machine that has...
Differential Analysis for Machine Replacement Proposal Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, eight-year life $38,000 Annual depreciation (straight-line) 4,750 Annual manufacturing costs, excluding depreciation 12,400 Annual nonmanufacturing operating expenses 2,700 Annual revenue 32,400 Current estimated selling price of...
During an analysis of the capital structure of ABC Inc. it has been determined that the...
During an analysis of the capital structure of ABC Inc. it has been determined that the optimal debt (debt to capital ratio or DCR) should be targeted at 50%. Given the following information answer these two fundamental questions regarding its capital structure now and after the proposed changes: The market value if its current debt is $500 million, the current share price is $10 and 1 million shares are outstanding at this time. It's marginal tax rate is 40% and...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to...
Which of the following distinguishes scenario analysis from sensitivity analysis? a. Scenario analysis only applies to new product development projects. b. Sensitivity analysis only applies to new product development projects c. Sensitivity analysis involves changing one project variable at a time while scenario analysis involves changing more than one project variable at the same time d. Sensitivity analysis only applies when projects are mutually exclusive. 3. Which of the following statements is true regarding the internal rate of return (IRR)?...
Jan Volk, financial manager of Green Sea Transport (GST), has been asked by her boss to...
Jan Volk, financial manager of Green Sea Transport (GST), has been asked by her boss to review GST’s outstanding debt issues for possible bond refunding. Five years ago, GST issued $40,000,000 of 11%, 25-year debt. The issue, with semiannual cou- pons, is currently callable at a premium of 11%, or $110 for each $1,000 par value bond. Flotation costs on this issue were 6%, or $2,400,000. Volk believes that GST could issue 20-year debt today with a coupon rate of...
Section 2 - CASE ANALYSIS (30 marks) INSTRUCTIONS: 1. Read the case below carefully and answer...
Section 2 - CASE ANALYSIS INSTRUCTIONS: 1. Read the case below carefully and answer ALL the questions which follow. 2. Your answers may be entered using a Microsoft Excel spreadsheet OR may be entered in a table format using Microsoft Word. HEALTHY OPTIONS INC. Healthy Options is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardiovascular diseases. The company has to invest in equipment which...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT