Financial analyst for large metropolitan area transportation

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Reference no: EM131552310

As a financial analyst for a large metropolitan area's transportation authority, you and the information technology department come up with a new system in which drivers will no longer have to stop to pay tolls, and will instead use tags in cars that are read by antennae at toll plazas, which charge drivers’ accounts. The initial investment in the necessary equipment to set up the new system will cost your authority $4.1 million. This equipment is expected to last 12 years. It is also expected that it will cost $230,000 per year in the first year to maintain the system, and this amount is expected to increase by 5 percent every year. You expect that the system will generate $560,000 in cash inflows from increased activity at toll plazas and contracts with outside vendors. This cash inflow is expected to increase by 6percent each year. Your cost of capital is 5%. What capital budgeting technique should you use to analyze this project? Should you undertake the project?

Why or why not? What if your cost of capital is 6%? Should you pursue it then? Again, why or why not?

Reference no: EM131552310

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