Question: A Company is considering to bid on a construction contract for a new bridge. Construction is estimated at 30 months, with costs of $2 million per month. Once the bridge is open the expect tolls will be $10 million per year and maintenance will cost $1 million per year. The MARR is 15%/year. To bid on the project, the company specifies the price that is willing to pay to the state (in cash, at time 0). This includes the right to build the bridge and operate it for a period of 30 years. At the end of 30 years, the ownership and operation of the bridge revert to the state.
a. A construction line of credit at 10% per year is available to the company that can be used to cover all the construction expenses plus all of the accrued interest. What will be the outstanding balance when the bridge is completed?
b. Once the bridge is open, and company can start to receive a steady stream of income, the company can refinance the construction loan at a lower interest rate of 8%/year, with the loan being paid off in 30 years. What will the annual payments be on this loan?
c. What is the cash flow (toll revenue minus payments on your loan) from operating the bridge worth to the company at the end of month 30 when the bridge opens?
d. What are should the company be willing to bid for the bridge?