Reference no: EM131166877

The provincial Department of Transportation pays Happy Ferry Company to transport cars across a bay that effectively splits the largest city in the province. Happy Ferry Company has submitted a bid of $5 million per year (to be paid to them by the province) for 15 years to provide the service since their current contract will run out shortly. The benefit associated with the ferry in time savings, gasoline consumption, etc., is estimated at $3 per car. A low-level bridge can be constructed that will increase the user benefits to $4.50 per car, mainly due to the reduced time needed to cross the bay. The low-level bridge will have a first cost of $30 million and annual maintenance charges of $1.8 million. A second bridge design will cost $37 million to implement with $2.5 million annual maintenance costs. The user benefits are estimated at $5.60 per car with the second bridge design. Assuming no other costs or salvage values, and given a 15-year bridge life, use an 8 percent interest rate and the assumption that 2 million cars per year will use either a ferry or a bridge in determining which alternative to recommend.