A. Consider the example of renovating a highway that is in poor shape, with large holes and crumbling shoulders that slow down traffic and pose an accident risk. The costs include the inputs: asphalt 1 million bags, labour 1 million hours and the maintenance cost which is $10 million/year. Suppose the price of Asphalt is $100/bag.
Half of the workers worked in other industries before coming to work for this project and half of the workers were unemployed before working for this project. Assume the wage for these workers is $20/hour. The reservation wage for those unemployed is $5/hour.
Suppose the nominal interest rate is 7% and the inflation rate is 3%. The benefits for the project include the driving time saved and life saved. Suppose the project can save 500,000 hours in total. People would also pay $1 dollar more to save half an hour. The lives saved are 5 lives a year. Assume people will pay $5 million to save one person.
i) Calculate the cost of the project?
ii) Calculate the benefit of the project?
iii) Is this project admissible and if so, why?
iv) Outline and explain the different steps you will undertake to assess the feasibility of a public project.
v) Why is the Net Present Value considered as the best method of evaluation?