Question: Consider a plan to improve lighting on a dangerous section of highway.

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Question: 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 () lllustrate the timing of the benefits and costs using a timeline. . (ii)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? . (ii) 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 uncertaintyyou undertake (i) expected value analysis, and ) worst-case analysis Briefly explain what you would do in each case. Does this additional analysis support your initial recommendation (from question (i) above)?

Explanation / Answer

(1)Since NPV is positive in expected terms we will undertake the project.

(2)Since NPV is Negative in worst case scnerio terms we will not undertake the project.

Yes the part 1 supported my decision.

1 Year Amount Remarks 0 -50,00,000.00 Initial Outflow 1       9,24,000.00 Annual savings 2       9,24,000.00 Annual savings 3       9,24,000.00 Annual savings 4       9,24,000.00 Annual savings 5       9,24,000.00 Annual savings 6       9,24,000.00 Annual savings 7       9,24,000.00 Annual savings 8       9,24,000.00 Annual savings

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