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Imagine that you are the governor of Virginia and need to decide if you should support...

Imagine that you are the governor of Virginia and need to decide if you should support the “Super Bowl” highway and bridge construction project. The Super Bowl is estimated to take 5 years to complete. The project will require $150 million in construction materials per year and $75 million in labor costs per year in the first 2 years (i.e., 1st and 2nd years), and $130 million in construction materials per year and $90 million in labor costs per year in the next 3 years (i.e., 3rd, 4th, and 5th years). In addition, the construction will disrupt transportation within the city for the duration of the construction. The transportation disruption lengthens transport times for 80,000 workers by 25 hours per year. All workers are paid $20 per hour. The Super Bowl, when finished, will ease transportation within the city. Each of the 80,000 workers will have their transport time reduced by 60 hours per year as compared to the preconstruction transport time. In addition, part of the Super Bowl project involves converting the space formerly taken up by an elevated highway into a large park. The State of Virginia has determined that each worker will value the park at $50 per year. We will assume that no one else will use the park. We also assume the government has a 3% discount rate and that the workers live forever. The benefits to the Super Bowl begin in year 6, assuming the project begins in year 1 (i.e., the project runs for 5 years, from t=1 to t=5). Calculate the total cost, total benefit, and net befit (use the table on the next page)

a) Calculate the total cost, total benefit, and net benefit.

b) You also need to add a $5 million cost annually to maintain the “Super Bowl” highway in year 6 and after. Revise the total cost, total benefit, and net benefit.

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Homework Answers

Answer #1

a)

Given discount rate i=3%

so PV=FV/(1+i)^(t-1)

t=year

Total Cost =$1236.30 mn

Total benefits =$2875.36 mn

Net benefit=2875.36-1236.30=$1639.06 mn

B)

After 6 years we will have $5 mn maintenance cost for life time so

t=6 Present value of maintenance cost= Maintenance cost/discount rate=5/3%=$166.67 mn

t=1 Present value of maintenance cost=FV/(1+i)^5=166.67/(1.03)^5=$143.77 mn

Revised Total cost=1236.30+143.77=$1380.06

Total benefits =$2875.36 mn

Revised Net benefit=2875.36-1380.06=$1495.294 mn

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