U.S. route 83 passes through the village of Burr Ridge, IL. The engineers of the Transportation Department have proposed constructing a new highway through existing farmland to bypass the city for use by through traffic. The new bypass would however entail an initial construction cost of $40 million and an average annual maintenance cost of $50,000. Assuming the overall user and non-user costs (associated with the positive and negative impacts) of the new project amount to $2 million per year, facility life of 25 years, and an annual nominal discount rate of 6% compounded quarterly, determine whether the project is worthwhile on the basis of agency costs, user costs, and non-user costs.

U.S. route 83 passes through the village of Burr Ridge, IL. The engineers of the Transportation Department have proposed constructing a new highway through existing farmland to bypass the city for use by through traffic. The new bypass would however entail an initial construction cost of $40 million and an average annual maintenance cost of $50,000. Assuming the overall user and non-user costs (associated with the positive and negative impacts) of the new project amount to $2 million per year, facility life of 25 years, and an annual nominal discount rate of 6% compounded quarterly, determine whether the project is worthwhile on the basis of agency costs, user costs, and non-user costs.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter17: Long-term Investment Analysis

Section: Chapter Questions

Problem 9E

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