Year 0 1 2 Cost($) 50,000,000 10,000,00 10,000,00
Expected lives saved 0 4 4

There are two alternative ways of traveling between a particular pair of cities. The first alternative is to travel by train, which takes 5 hours and has a record of fatally crashing in 3 of every 1 million trips (i. e., the probability of a fatal crash is 0.000003). The second alternative is to travel by airplane, which is much faster (2 hour travel time) but incurs additional risk, as the airline has a record of fatally crashing in 7 out of every 1 million trips (i. e., the probability of a fatal crash is 0.000007). The value of time is $15 per hour for a typical individual traveling between these cities. The two alternatives are otherwise completely equivalent (for example, the price of a train ticket is the same as the price of a plane ticket).

Required:
a. If consumer behavior has demonstrated that the typical traveler is indifferent between the two travel alternatives (views them as equally attractive), what is the implied value of a statistical life (VSL)?
b. The department of transportation in this area is considering a temporary highway safety project that would remain in place for the next two years. The project would have an immediate cost of $50 million, and additional maintenance costs of $10 million in each of the two years during which the project is in place. The risk reduction for the drivers and passengers of vehicles using this highway is such that the project is expected to save four lives in each of these two years. The only relevant costs and benefits are those described above (shown in the table below), the real discount rate used by the department is 5%, and all amounts have been expressed in real dollars. Treat the annual costs and benefits as occurring at the end of the years in which they are paid or received. Given the VSL that you calculated in part (a), what is the NPV of this project?