5. Suppose that you are the governor of Istanbul and trying to decide whether you should support the third Bosporus Bridge construction project. The project is estimated to take 5 years to complete. The project will require $50 million in construction materials per year and $20 million in labor costs per year. In addition, the project will disrupt transportation within the city for the duration of the construction. The transportation disruption lengthens transport times for 1 million workers by 20 hours a year. The project, when finished, will ease transportation within the city. Each of the 1 million workers will have their transport time reduced by 60 hours a year as compared to the pre-construction transport time for 10 years. Assume that all workers are paid $10 per hour (in other words, one hour of a worker lost/gained is worth $10), the discount rate is 5% and the benefits of the project is accrued between years 6 and 15. (a) (10 points) Show the yearly benefits and costs of this project on a table. (b) (10 points) Calculate the present value of the net benefits of this project.

Explanation:

Part a)

Year  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15

Benefits      $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000

Costs                

Construction materials  $50,000,000  $50,000,000  $50,000,000  $50,000,000  $50,000,000          

Labor costs  $20,000,000  $20,000,000  $20,000,000  $20,000,000  $20,000,000          

Transport disruption cost  $200,000,000  $200,000,000  $200,000,000  $200,000,000  $200,000,000          

Net benefit  -$270,000,000  -$270,000,000  -$270,000,000  -$270,000,000  -$270,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000

Part b)

Year  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15

Benefits      $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000

Costs                

Construction materials  $50,000,000  $50,000,000  $50,000,000  $50,000,000  $50,000,000          

Labor costs  $20,000,000  $20,000,000  $20,000,000  $20,000,000  $20,000,000          

Transport disruption cost  $200,000,000  $200,000,000  $200,000,000  $200,000,000  $200,000,000          

Net benefit  -$270,000,000  -$270,000,000  -$270,000,000  -$270,000,000  -$270,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000  $600,000,000

P V F at 5%  $0.9524  $0.9070  $0.8638  $0.8227  $0.7835  $0.7462  $0.7107  $0.6769  $0.6447  $0.6140  $0.5848  $0.5570  $0.5305  $0.5052  $0.4811

P V of net benefit  -$257,148,000  -$244,890,000  -$233,226,000  -$222,129,000  -$211,545,000  $447,720,000  $426,420,000  $406,140,000  $386,820,000  $368,400,000  $350,880,000  $334,200,000  $318,300,000  $303,120,000  $288,660,000

Present value of net benefit = sum of P V of net benefit = $2,461,722,000

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