Question

2. An initial investment of $5,000,000 in road construction lead to a reduction of 150 accidents per year an safety improvements will of time saving for each r the next 40 years will be d one hour each day. The annual operating/maintenance cost ove In addition it requires a major maintenance in five years at a cost of $500 $950,000 9950,000.The cost of each accident is estimated to be S7,500. Assume ana cost for each hour lost. On the average 500 people use the interest rate of5% is this project justified? average of $15 road daily. At an annual

Answer 1

Annual saving in life = $7,500 x 150 = $1,125,000

Annual saving in time = $15 x 1 x 500 x 365 = $2,737,500 (assuming 365 days per year on average)

Total annual cost saving ($) = 1,125,000 + 2,737,500 = 3,862,500

Annual net savings ($) = Total annual cost saving - Annual maintenance cost = 3,862,500 - 500,000 = 3,362,500

Net present worth (NPW) ($) = - 5,000,000 + 3,362,500 x P/A(5%, 40) - 950,000 x P/F(5%, 5)

= - 5,000,000 + 3,362,500 x 17.1591** - 950,000 x 0.7835**

= - 5,000,000 + 57,697,474 - 744,325

= 51,953,149

Since NPW > 0, project is justified.

**From P/A and P/F Factor tables