The City of Washington is considering adding new buses for its current mass-tran
ID: 2736205 • 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 SH) 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 8()().(X)() 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
Initial Investment Package = 10,000,000
Present value of Salvage Value = 850000/1.05^10 = $ 521,826.27
Present Value of O & M Cost = 5000000/1.05 * 10 = 47,619,047.62
Total Minimum Present value for fair price = 10,000,000 + 47619047.62- 521826.27
Total Minimum Present value for fair price = $ 57,097,221.35
Annual Cash Flow Required from Bus = 57097221.35/ ((1-(1+5%)^-10)/5%)
Annual Cash Flow Required from Bus = $ 7,394,351.38
Fair Price to charge per trip = 7394351.38/800000
Fair Price to charge per trip = $ 9.25