Question

Bill rides the subway at a cost of $.75 per trip but would switch if the price were any higher. His only alternative is a bus that takes five minutes longer, but costs only $.50. His only alternative is a bus that takes five minutes longer but costs only $.50. He makes 10 trips a year. The city is considering renovations of the subway system that will reduce the trip by 10 minutes, but fares would rise by $.40 per trip to cover the costs. The fare increase and reduced travel time both take effect in one year and last forever. The interest-rate is 25%.

Some members of the city Council propose an alternative project that consists of an immediate tax of $1.25 per middle-class person to provide free legal services for the poor in both of the following two years. The legal services are valued by the poor at a total of $62,500 per year. (Assume this amount is received at the end of each of the two years.) What is the present value of the project?

Answer 1