In 2006 the State of Indiana sold a 75-year concession to operate and maintain the East-West Toll Road. Before doing so, it commissioned a consulting report that estimated the value of the concession. You can access this report at www.in.gov/ifa/ files/TollRoadFinancialAnalysis.pdf. Download the spreadsheet of the forecasted cash flows from the toll road from this book’s Web site at www.mhhe.com/bma to answer the following questions. (Note: Cash flows are reported only for each 10-year block. Except where more information is available, we have arbitrarily assumed cash flows are spread evenly during those 10 years.)
a. Calculate the present value of the concession using a discount rate of 6%. (Note: Your figure will differ slightly from that in the consultant’s report because we do not have exact cash flow forecasts for each year.)
b. The consultant chose this discount rate because it was the interest rate that the state paid on its bonds. Do you think that this was the correct criterion? Why or why not?
c. How does the value of the concession change if you use a higher discount rate?
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