Argentina is considering constructing a bridge across the Rio de La Plata to connect its Northern coast to the Southern coast of Uruguay. If this bridge is constructed, it will reduce the travel time from Buenos Aires, Argentina to Sao Paulo, Brazil by over 10 hours, and has the potential to significantly improve the flow of manufactures goods between the two countries. The cost of the new bridge, which will be longest bridge in the world and span over 50 miles, will be $700 million. The bridge will require an annual maintenance of $10 million for repairs and upgrades, and is estimated to last 80 years. It is estimated that 550,000 vehicles will use the bridge during the first year of operation, and an additional 50,000 vehicles per year until the 10th year. These data are based on a toll charge of $90 per vehicle. The annual traffic for the remainder of the life will be 1,000,000 vehicles per year. The government requires a minimum rate of return of 15% in order to process with the project.
a) Calculate NPV, IRR, and the payback period. What decision you would make based on these results?
b) Would the decision change if they could borrow up to 70 percent of the cost at 4 percent interest rate from the World Bank (paid in annual payments over 50 year period)?
c) What other considerations are there in deciding whether or not to construct the bridge?