The City of Washington is considering adding new buses for its current mass-tran
ID: 1219095 • Letter: T
Question
The City of Washington is considering adding new buses for its current mass-transit system that links from the Tacoma International Airport to clustering city destinations on non-stop basis. The total investment package is worth $10 million and expected to last 10 years with a salvage value of $850,000. The annual operating and maintenance costs for buses would be $5 million during the first year and will grow by 5% each year over the previous year's O&M; costs thereafter. If the system is used for 800,000 trips per year, what would be the fair price to charge per trip? Assume that the City of Washington uses 5% interest rate for any city-sponsored project. Assume the fare will be the same for all destinations.Explanation / Answer
The cash flows from the project can be listed as follows
NPV can be calculated as follows
=NPV(5%,F3:F12)+F2 = -64,162,608.81
Since these are costs, sign is negative
Now we have to find out the price at which profit are 0, So
64,162,608.81 = P * 800,000
P = 64,162,608.81 / 800,000 = $80.20 per trip
Year Initial Investment O&M Depreciation Salvage Value Total Cashflow 0 (10,000,000.00) (10,000,000.00) 1 - (5,000,000.00) (915,000.00) (5,915,000.00) 2 - (5,250,000.00) (915,000.00) (6,165,000.00) 3 - (5,512,500.00) (915,000.00) (6,427,500.00) 4 - (5,788,125.00) (915,000.00) (6,703,125.00) 5 - (6,077,531.25) (915,000.00) (6,992,531.25) 6 - (6,381,407.81) (915,000.00) (7,296,407.81) 7 - (6,700,478.20) (915,000.00) (7,615,478.20) 8 - (7,035,502.11) (915,000.00) (7,950,502.11) 9 - (7,387,277.22) (915,000.00) (8,302,277.22) 10 - (7,756,641.08) (915,000.00) 850,000.00 (7,821,641.08)