The county municipal council owns a toll bridge that costs the county $250,000 t

Question

The county municipal council owns a toll bridge that costs the county $250,000 to every year to operate and $130,000 a year to maintain. The facility brings in revenue of to $500,000 per year. There is a proposal to sign a 10-year lease of the bridge to a private operator who will give the county $1 million upfront with the understanding that the private operator will be responsible for the operation and maintenance of the bridge throughout the lease period and keep the revenues. Assume a 4% interest rate. Should the proposal be accepted?

Explanation / Answer

Answer is yes, Proposal should be accepted. Please find below explanation:

Total costs of County and Maitenance per year = $380,000

Revenue/year = $500,000

Profit per year = $500,000 - $380,000 = $120,000

Cumulative Profit after 10 years= $1,200,000

Now, Proposal Amount for 10 years = $1,000,000

Interest rate= 4%

Proposal value after 10 years = $1,000,000 + ($1,000,000 *4 *10) / 100 = 1,400,000

As we can see, the proposal value after 10 years is $200,000 more than cumulative profit after 10 years. So there is benefit of $200,000 while accepting the proposal.

So answer is Yes, Proposal should be accepted.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.