Corporate finance

A highway construction company is under contract to build a new roadway through a scenic area and two rural towns in Colorado. The road is expected to cost $18 million, with annual upkeep estimated at $ I 50,000 per year. Additional income from tourists of $900,000 per year is estimated.

If the road is expected to have a useful commercial life of 20 years, use one spreadsheet to determine if the highway should be constructed at an interest rate of 6% per year by applying (a) the B – C method, (b) the B/C method, and (c) the modified B/C method. (Additionally, if the instructor requests it: Set up the spreadsheet for sensitivity ana lysis and use the Excel IF operator to make the build-don’ t build decision in each part of the problem.)

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The U.S. Army Corps of Engineers is considering the feasibility of constructing a small flood control dam in an existing arroyo. The initial cost of the project will be $2.2 million, with inspection and upkeep costs of $10,000 per year. In addition, minor reconstruction will be required every 15 years at a cost of $65,000. If flood damage will be reduced from the present cost of $90,000 per year to $10,000 annually, use the benefit/cost method to determine if the dam should be constructed. Assume that the dam will be permanent and the interest rate is 12% per year.

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