The Mayor of Chicago is considering two rail transportation projects that you have been asked to evaluate. The first project is for locomotive modifications to improve fuel efficiency across the Chicago regional freight rail network. The project benefits come from fuel cost savings. The second investment project is for Chicago passenger rail infrastructure enhancements such as adding second set of tracks at congested network locations. The Mayor assumes this increased capacity will boost ticket and pass sales and those benefits are shown below. Both projects would provide benefit to the city for the next 30 years. Based upon the level of investment risk, the city Treasurer has suggested that financing could be secured at an annual rate of 7%. A number of alternatives have been developed for each project. The lump sum of the initial cash outlay and the ongoing monthly benefits have been estimated for each alternative and are shown in the following tables: Freight Rail Network Investment Monthly Benefit ($K) Alternative (SK) F0* 24.95 56.56 79.84 89.82 F1 F2 F3 F4 3,000 6,000 9,000 12,000 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |($K) PO* P1 P2 P3 P4 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 FO* and PO* are the "do-nothing" alternatives for the Freight and Passenger Networks respectively. For parts a, b, and e consider only the costs and benefits that have been converted to dollar terms. a) Which, if any, of these alternatives are simply not justified?
The Mayor of Chicago is considering two rail transportation projects that you have been asked to evaluate. The first project is for locomotive modifications to improve fuel efficiency across the Chicago regional freight rail network. The project benefits come from fuel cost savings. The second investment project is for Chicago passenger rail infrastructure enhancements such as adding second set of tracks at congested network locations. The Mayor assumes this increased capacity will boost ticket and pass sales and those benefits are shown below. Both projects would provide benefit to the city for the next 30 years. Based upon the level of investment risk, the city Treasurer has suggested that financing could be secured at an annual rate of 7%. A number of alternatives have been developed for each project. The lump sum of the initial cash outlay and the ongoing monthly benefits have been estimated for each alternative and are shown in the following tables: Freight Rail Network Investment Monthly Benefit ($K) Alternative (SK) F0* 24.95 56.56 79.84 89.82 F1 F2 F3 F4 3,000 6,000 9,000 12,000 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |($K) PO* P1 P2 P3 P4 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 FO* and PO* are the "do-nothing" alternatives for the Freight and Passenger Networks respectively. For parts a, b, and e consider only the costs and benefits that have been converted to dollar terms. a) Which, if any, of these alternatives are simply not justified?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
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Transcribed Image Text:The Mayor of Chicago is considering two rail transportation projects that you have been asked to evaluate. The first project
is for locomotive modifications to improve fuel efficiency across the Chicago regional freight rail network. The
project benefits come from fuel cost savings. The second investment project is for Chicago passenger rail
infrastructure enhancements such as adding second set of tracks at congested network locations. The Mayor assumes
this increased capacity will boost ticket and pass sales and those benefits are shown below. Both projects would
provide benefit to the city for the next 30 years. Based upon the level of investment risk, the city Treasurer has
suggested that financing could be secured at an annual rate of 7%. A number of alternatives have been developed for
each project. The lump sum of the initial cash outlay and the ongoing monthly benefits have been estimated for each
alternative and are shown in the following tables:
Freight Rail Network
Monthly
Benefit ($K)
Investment
Alternative
($K)
F0*
F1
F2
F3
F4
3,000
6,000
9,000
12,000
24.95
56.56
79.84
89.82
Passenger Rail Network
Monthly
Benefit ($K)
Investment
Alternative
($K)
PO*
29.94
3,000
6,000
9,000
12,000
P1
P2
51.56
66.53
73.18
P3
P4
F0* and PO* are the "do-nothing" alternatives for the Freight and Passenger Networks respectively.
For parts a, b, and c consider only the costs and benefits that have been converted to dollar terms.
a) Which, if any, of these alternatives are simply not justified?
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