Question

6. The state of California is considering a Bullet Train (high speed rail) between LA and San Francisco. The initial cost of the train will be $80 billion with ongoing maintenance of $1 billion per year. In addition, there will be a $20 billion overhaul that will occur every 10 years. The ongoing benefits from paid ridership and increased economic activity will be $9 billion annually. Assume the life of the project is forever infinite), and the required return is 6%. Is this project justified using Benefit Cost ratio B/C)?

Answer 1

Present worth of all costs = 80b + 1b / 0.06 + 20b *(A/F,6%,10) / 0.06

= 80b + 1b / 0.06 + 20b *0.0759 / 0.06

= 121.97b

Present worth of all benefits = 9b / 0.06 = 150b

B/C ratio = Present worth of all benefits / Present worth of all costs

= 150b / 121.97b

= 1.23

As B/C is greater than 0, project is justified