Reference no: EM133126586

Suppose that there are 100,000 people with identical preferences. Each of person rides the train to work at a price of $10 per trip and given the speed of the train, they would stop if the price were higher. The alternative to the train is to take a bus that costs $7.50 per trip. Taking the bus increases the trip by 60 minutes. The city is considering upgrading the train to a higher-speed train that is 60 minutes faster than the current train. We know the following:

• There would be an initial investment of $400 million a paid immediately and an additional $100 million investment due at the end of the first year.
• The price to ride the new higher-speed train will be set at $12.00 per trip, which is needed to cover new operating costs of the trains.
• Each person makes 1,000 trips per year and the proposed upgraded train would be ready at the end of two years from now.
• There will be no disruption in the old train service during the two years of construction of the new high-speed train service.
• The opportunity cost for this project is 5%.

A. What is the net present value of the train project?

B. Based on your analysis is it admissible for the city to go forward with the train project (why)?

C. If it is later suspected that the discount rate may be either 3% or 7% what would you do to see if this project is admissible now (just tell me what you would do...you don't have to re-calculate anything in this part)