A city is considering investing in speed cameras. It is projected that the yearly operating costs will be $10 million dollars and the yearly revenues $16 million. It has been agreed that the net profit, that is, profit after covering operating expenses, is shared between the city and the operator of the system. The city will receive 2/3 of the net profit and the operator 1/3.
(a) If the initial cost of the system is $20 million (paid by the city) and given a 15 year planning horizon, what is the city’s rate of the return? (Do by hand and show all work.)
(b) Given the city requires a minimum rate of return of 20%, should they invest in speed cameras?