A local city council is considering a major transit expansion.  The project requires purchases of $40 million in equipment now and annual expenses of $1 million each year starting in 2 years.  The transit expansion is expected to reduce road congestion beginning next year and reduce respiratory illness in the region by 5% in 3 years.  These benefits have been estimated monthly as 30 hours less time commuting.  There are 250,000 commuters in the region and the average wage is $30 hour.  Respiratory illness costs the local health system $500,000 each year.  The council has asked you to complete a cost-benefit analysis of the project. Present one with a time horizon of 5 years and another over the next 20 years.  Current interest rates are 2%

1. Calculate the PV of $10 million received in 5 years. Use a discount rate of 2%.
2. Suppose in a certain city the demand for low-cost housing can be characterized by the equation

 P = 200 - 2Q, where Q is housing measured in square feet. Further, suppose that supply is characterized by the equation: P = 15 + 3Q.

(A) How much consumer surplus is there?
(B) Suppose that a grant is given so that the supply of housing is increased. This increase changes the supply curve to P = 3Q. How much does consumer surplus change because of the grant?

Answer rating: 100% (QA)

Year PV factor 2 Costs PV of costs Benefits Total benefits PV of benefits Road congestion Respiratory illness 0 100000 4000000000 4000000000 1 098039 ... View the full answer