Question

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.

Answer 1

Step-by-step 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

cheers i hope this helped !!