The state of Minnesota is considering building a highway through undeveloped wilderness. The construction will take 1 year and the construction costs are estimated at $10 million. The annual routine maintenance costs are expected to be $1 million per year. The relevant interest rate is 5%. The expected estimated annual benefits to the public and environment are $2 million per year. Assume an infinite project life.
a. Find the PV of the Costs of this project.
b. the PV of the benefits of this project.
c. the PV of the Benefits – PV of the Costs.
d. Find the annual value of benefits which generates a zero net present value.
2. Assuming an infinite project life, find the increase in annual routine maintenance costs that make the NPV = 0.
3. Repeat 1a-d but assume a 20 year project life.