Reference no: EM131917903

A secondary road in a developing country, 30 km long is to be improved by surface treating the gravel surface without any change in length. The cost of improvement is estimated at $150,000 per km. Present annual transport costs (vehicle operating costs and maintenance costs, etc.) for all traffic on the existing road is estimated at $200,000 per km per annum. After improvement, this is expected to reduce to $170,000 per km per annum. Improvement takes place in two years with equal expenditures in each year (i.e., improvement costs of $75,000 for year 0 and $75,000 for year 1, giving a total of $150,000). Assume that the second year of construction, transportation costs on the improved road is equivalent to present costs on half of the length and new transport costs on the other half (i.e., the transportation costs is $200,000 for year 0, ($200,000+$170,000)/2 for year 1, and $170,000 for years 2, …21). Would you undertake this project? If Minimum Attractive Rate of Return is 8% and project life is 20 years after reconstruction (i.e., n=21 years). Resurfacing will be required 10 years after reconstruction at a costs of 55,000 per km. Use the Net Present Value Method.