Cash flows except initial investments

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The city of Middleville is considering offering public bus service. Setting up the service will cost the city $1.7M (where M stands for million). The useful life of the buses is 18 years. Annual maintenance of the buses would cost $135,000 per year and they would need a major overhaul in year 10 that will cost a total of $890,000. This overhaul is in addition to the annual maintenance. Annual labor and administrative costs will begin at $170,000 in year 1 and grow at 1.0% per year thereafter. The buses will generate a revenue of $305,000 in year 1 and it will grow at 4.0% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city $405,000 per year. The salvage value (price the city can get in the future after maintenance) of the used buses in year 18 is expected to be $480,000. What is the NPV of the bus proposal? The city does not pay taxes and the discount rate is 6.3%. Assume that all cash flows except initial investments happen at the end of the year and you are strongly encouraged to use a spreadsheet to solve this problem.

Reference no: EM131114331

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