The city of Middleville is considering offering public bus service. Setting up the service will cost the city $1.4M (where M stands for million). The useful life of the buses is 18 years. Annual maintenance of the buses would cost $120,000 per year and they would need a major overhaul in year 10 that will cost a total of $755,000. This overhaul is in addition to the annual maintenance.
Annual labor and administrative costs will begin at $165,000 in year 1 and grow at 2.0% per year thereafter. The buses will generate revenue of $275,000 in year 1 and it will grow at 5.5% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city $320,000 per year. The salvage value (price the city can get in the future after maintenance) of the used buses in year 18 is expected to be $405,000. What is the NPV of the bus proposal? The city does not pay taxes and the discount rate is 5.2%. Assume that all cash flows except initial investments happen at the end of the year and you are strongly encouraged to use a spreadsheet to solve this problem.( A real world problem with some simplifications in cash flows.)
NPV is:
$3,380,235.59
$3,686,329.44
$3,231,561.80
$3,068,942.64
Answers: 2
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The city of Middleville is considering offering public bus service. Setting up the service will cost...
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