Reference no: EM132177016

The state is considering the elimination of a railroad grade crossing by building an overhead pass. The new structure together with the needed land, would cost $1,800.000. The analysis period is assumed to be 30 years on the theory that either the railroad or the highway above it will be relocated by then. Salvage value of the bridge (actually, the net value of land on either side of the railroad tracks) 30 years hence is estimated to be $100,000. A 6% interest rate is to be used.

At present approximately 1,000 vehicles per day are delayed as a result of trains at the grade crossing. Trucks represent 40% and 60% are other vehicles. Time for truck drivers valued at $18 per hour and for other drivers at $5 per hour. Average time saving per vehicle will be 2 minutes if the overpass is built. No time saving occurs for the railroad.  

The installation will save the railroad an annual expense of $48000 now spent for crossing guards. During the preceding 10-year period the railroad has paid out $600,000 in settling lawsuits and accident cases related to the grade crossing. The proposed project will entirely eliminate both of these expenses. The state estimates that the new overpass will save it approximately $6,000 per year in expenses attributed directly to the accidents. The overpass if built will belong to the state.

Perform a benefit-cost analysis to answer the question of whether the overpass should be built. If the overpass is built how much should the railroad be asked to contribute to the state as its share of the $1,800.000 construction cost?