Burlington Northern is considering the elimination of a railroad grade crossing

Question

Burlington Northern is considering the elimination of a railroad grade crossing by constructing a dual-track overpass. The railroad subcontracts for maintenance of its crossing gates at $11,500 per year. Beginning 4 years from now, however, the costs are expected to increase by $1000 per year into the foreseeable future ( that s, $12,500 4 years from now, $13,500 five years from now, etc.) The overpass will cost $1.4 million (now) to build, but it will eliminate 100% of the auto-train collisions that have cost an average of $250,000 per year. If the railroad uses a 10-year study period and an interest rate of 10% per year, determine whether the railroad should build the overpass.

Explanation / Answer

OK, the subcontracting is interesting, but that is chump change. At the end of one year we owe $1,4000,000x110% -$250,000 = $1,290,000 Keep this going 1400000 1290000 1290000 1169000 1169000 1035900 1035900 889490 889490 728439 728439 551282.9 551282.9 356411.19 356411.19 142052.309 142052.309 -93742.4601 -93742.4601 -353116.7061 So, after ten years we are $353,116 ahead by building (not to mention the lives saved) We can also add in the subcontracting if there are some really conservative board members. Here I subtract the subcontracting from the last column. 11500 1400000 1278500 11500 1278500 1144850 11500 1144850 997835 11500 997835 836118.5 12500 836118.5 657230.35 13500 657230.35 459453.385 14500 459453.385 240898.7235 15500 240898.7235 -511.40415 16500 -511.40415 -267062.5446 17500 -267062.5446 -561268.799 Now we see that we should break even after eight years.

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