Reference no: EM132580271

The city of Middleville is considering offering public bus service. Setting up the service will cost the city $1.1M (where M stands for million). The useful life of the buses is 20 years. Annual maintenance of the buses would cost $88,000 per year and they would need a major overhaul in year 14 that will cost a total of $605,000. This overhaul is in addition to the annual maintenance. Annual labor and administrative costs will begin at $135,000 in year 1 and grow at 1.5% per year thereafter. The buses will generate a revenue of $185,000 in year 1 and it will grow at 5.5% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city $220,000 per year. The salvage value (price the city can get in the future after maintenance) of the used buses in year 20 is expected to be $295,000. What is the NPV of the bus proposal? The city does not pay taxes and the discount rate is 5.9%. Assume that all cash flows except initial investments happen at the end of the year and you are strongly encouraged to use a spreadsheet to solve this problem.