been asked to examine the financial feasibility of a toll bridge the town to cos
ID: 2800489 • Letter: B
Question
been asked to examine the financial feasibility of a toll bridge the town to cost basis to zero over that time $30,000 per year, and variable costs are and lighting for the bridge is expected to cost using a at $0.01 per car. The bridge will be municipal bond with a par value of $5,000,000 paying annual interest of 6% (for in 30 years this is an inter est only bond). The estimated annual traffic for the bridge is 1,700,000 cars and the toll will be set at $0.25 for each crossing. Because the city is a exempt (it t entity, it is tax- pays no taxes). Assume that toll price and traffic levels are expected to remain constant and all cash flows occur once per year at the end of each period. Also assume the cost to build the bridge is paid at one time when the bond is issued at time zero. 8) What is the expected annual earnings before interest and taxes (EBIT) from the project? b) 225,000 c) 211,333 d) 378,000 e) None of the above 9) What is the expected operating cash flow (OCF) from the project? (Hint: any cash interest expense not included in OCF but is part of cash flow to creditors instead) a) 378,000 b) 225,000 c) 78,000 d) -75,000 e) None of the above 10) What is the expected NPV from the project? a) NPV s-300,000 b) c) -300,000Explanation / Answer
As per rules, I will answer the first 4 sub parts of the first question
1. EBIT = 211333
= -Maintenance cost - Variable cost +Revenue- Depreciation
= ( -30000-0.01*1700000+ 0.25*1700000- 5000000/30 )
2. OCF = 378000
OCF= EBIT + Depreciation =211333+ 166667
3. Expected NPV = 0<NPV< 300000
PV of cash flows = =378000*(1-1.06^-30)/ 0.06 =
NPV = 5203106.2- 5000000 = $203,106
4. Financially break even OCF = 363245
Let the OCF be P
5000000= P*(1-1.06^-30)/0.06
300000/0.8258 = P
P = 363245
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