Conventional BIC analysis

Two routes are under consideration for a new interstate highway segment. The long route would be 25 kilometers and would have an initial cost of $21 million. The short transmountain route would span 10 kilometers and would have an initial cost of $45 million. Maintenance costs are estimated at $40,000 per year for the long route and $15,000 per year for the short route. Additionally, a major overhaul and resurfacing will be required every 10 years at a cost of LO% of the first cost of each route. Regardless of which route is selected, the volume of traffic is expected to be 400,000 vehicles per year.

If the vehicle operating expense is assumed to be $0.35 per kilometer and the value of reduced travel time for the short route is estimated at $900,000 per year, determine which route should be selected, using a conventional BIC analysis. Assume an infirute life for each road, an interest rate of 6% per year, and that one of the roads wiII be built.


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