Question

The city of Ottawa is planning a new expansion for its bike routes, the project cost is estimated to be $27,000,000 and is to be paid in 6 equal payments of $4,500,000 each (Payment 1 is due before commencement (now), Payments 2-6 at the end of years 1, 2, 3,4, and when the construction is done by the end of year 5). The feasibility assessment period of this project is 20 years after construction. This proposal benefits the city a total of $2,600,000 by reducing congestion and air pollution. The O \& M costs for the proposed routes is expected to be $500,000 per year. If the social discount rate for this project is chosen to be 5%

. A) Draw a cash flow diagram.

Answer 1

The cash flow diagram for this project includes payment installments over 5 years and net benefits at the end of a 20-year feasibility assessment period. There will also be annual O&M costs from Year 6 to Year 25.

Step-by-step explanation:

Cash Flow Diagram:

1. Payment 1 of $4,500,000 at time 0 (now)
2. Payment 2 of $4,500,000 at the end of Year 1
3. Payment 3 of $4,500,000 at the end of Year 2
4. Payment 4 of $4,500,000 at the end of Year 3
5. Payment 5 of $4,500,000 at the end of Year 4
6. Payment 6 of $4,500,000 at the end of Year 5
7. Net benefits of $2,600,000 at the end of the feasibility assessment period (Year 25)
8. O&M costs of -$500,000 per year from Year 6 to Year 25

The cash flow diagram for this project will include payment installments of $4,500,000 over the course of 5 years, starting with a payment at time 0 before commencement. After the construction is done by the end of Year 5, there will be net benefits of $2,600,000 at the end of the 20-year feasibility assessment period. Additionally, there will be annual O&M costs of -$500,000 from Year 6 to Year 25. This cash flow diagram represents the inflows and outflows associated with the project over the specified time period.