Question

1. The participants of an economy include:

2. The Metropolitan Transit Authority wants to expand the subway line from Lexington Avenue to 1^st Avenue from 14^th st to 42^nd in Manhattan. The MTA needs to raise 40 million dollars to implement this project. What area of finance does this project relate to?

Answer 1

This project relates to capital budgeting

In capital budgeting, the initial investment is compared to the discount present value of cash inflows. Therefore, the project should be accepted if the sum of discounted cash flows is greater than the initial investment. In this case, the subway line should be approved if the sum of discounted cash flows is greater than $40 million.

To calculate the sum of discounted cash flows, the cash flows of future years needs to be projected. Cash flows of future years can be estimated using the estimated passenger traffic and average revenue per passenger per trip. Once the cash flows are estimated, they should be discounted back to the present using the appropriate discount rate. If the sum of these cash flows is greater than the initial investment of $40 million, the subway line should be approved