The metropolitan transit authority (mta) has just opened a new subway line (the

Question

The metropolitan transit authority (mta) has just opened a new subway line (the orange line) in its underground transportation network. The orange line had a capital investment of $20 million, expected operating and maintenance expenses are $3 million per year, and the final salvage value at the end of a 40 year life is negligible. if the revenue generated by each customer is $3, how many customers per day will be required before the orange line can break even? The mta's hurdle (interest) rate is 5% compounded annually. assume there are 365 days in a year.

Explanation / Answer

Annual Cash Inflow Required = capital investment/ ((1-(1+ r)^-n)/r) + operating and maintenance expenses

Annual Cash Inflow Required =20,000,000/((1-(1+5%)^-40)/5%) + 3000000

Annual Cash Inflow Required = $ 4,165,563.22

No of Customer per Day required before the orange line can break even = Annual Cash Inflow Required/ revenue generated by each customer

No of Customer per Day required before the orange line can break even = 4,165,563.22/3

No of Customer per Day required before the orange line can break even = 1,388,521.07

Answer

No of Customer per Day required before the orange line can break even = 1,388,521.07

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