Question

Additional problems 1. Consider a plan to improve lighting on a dangerous section of highway. The improvements involve a one-time cost in year 1 of $5,000,000, would last 8 years, and are expected to reduce the annual number of accidents by 12. A recent report indicates that the average social cost of a motor vehicle crash is $77,000. a) b) Illustrate the timing of the benefits and costs using a timeline. Calculate the net present value of the project, assuming all benefits and costs accrue at the end of the year and a discount rate of 3%. Would you recommend this project? c) There is some uncertainty surrounding the accident reduction effects. Research suggests that there is a 75% chance that the number of crashes prevented is 12 and a 25% chance that only 9 crashes are prevented. To deal with the uncertainty you undertake (i) expected value analysis, and (ii) worst-case analysis. Briefly explain what you would do in each case. Does this additional analysis support your initial recommendation (from question (i) above) lot for londscane services is given by the following

Answer 1

Timeline 0 Cash flow 5000000 924000 924000 924000 924000924000 924000 924000 924000 NPV @ 3% 1486195.58 Since NPV is positive, project is favorable c)Expected value Reduction in annual crashes 12 0 4 Cash flow 5000000 924000 924000 924000 924000924000 924000 924000 924000 NPV @ 3% 1486195.58 Reduction in annual crashes9 0 4 6 Cash flow 5000000 693000 693000 693000 693000693000 693000 693000 693000 NPV @ 3% 135353.31 Prob Reduction in crash 12 NPV 1486195.58 75% -135353.31 25% Expected value 1080808.4 Since Expected value is positive, we can go ahead Worst case NPV of 9 crash reduction is negative as shown above Expected value analysis supports our initial decision. Worst case analysis do not