The government is considering constructing a new urban freeway for $500 million. This would save 30 000 commuters 10…

Question:

Transcribed Image Text:

The government is considering constructing a new urban freeway for $500 million. This would

save 30 000 commuters 10 000 hours a day (10 minutes each way) for 200 days a year. Suppose

that the road can be built in one year, commuters value their travel time savings at $20 per hour

and the road has a life of 30 years after year 1 and a residual value estimated at cost at $500 million

in year 32. There are no other costs or benefits. i. Would the road provide a net social benefit with

a discount rate of 7 per cent?

i) Would the road provide a net social benefit with a discount rate of 7 per cent?

Now suppose that the government charges a road toll of $2.50 each way and that traffic falls to

20,000 commuters twice a day.

ii)

What would be the financial outcomes using a 7 per cent discount rate?

iii)

What would be the net social benefit if the remaining commuters had an average

value of travel time of $25 per hour?

bir

Expert Answer:

Answer rating: 100% (QA)

i To determine if the road would provide a net social benefit with a discount rate of 7 percent we need to calculate the present value of the benefits

View the full answer