A highway department is considering building a temporary bridge to cut travel time during the three years it will take to build a permanent bridge. The temporary bridge can be put up in a few weeks at a cost of $750,000. At the end of three years, it would be removed and the steel would be sold for scrap. The real net cost of this would be $81,000. Based on estimated time savings and wage rates, fuel savings, and reductions in risks of accidents, department analysts predict that the benefits in real dollars would be $275,000 during the first year, $295,000 during the second year, and $315,000 during the third year. Departmental regulations require use of a real discount rate of 4 percent.
a. Calculate the present value of net benefits assuming that the benefits are realized at the end of each of the three years.
b. Calculate the present value of net benefits assuming that the benefits are realized at the beginning of each of the three years.
c. Calculate the present value of net benefits assuming that the benefits are realized in the middle of each of the three years.
d. Calculate the present value of net benefits assuming that half of each year’s benefits are realized at the beginning of the year and the other half at the end of the year.
e. Does the temporary bridge pass the net benefits test?