3. (a) The city of Urbano is renewing part of its bus fleet. It has the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. (a) The city of Urbano is renewing part of its bus fleet. It has the choice of buying single deck buses, articulated buses or double deck buses. They all use the same drive technology as existing buses. There are lots of factors in deciding which type to go for, but one criterion will be which fleet promises the highest net present value. At peak times the new Urbano buses will have to move 50,000 people per hour. The respective capacities of the different types of bus are: . . One single deck bus can carry 400 people per hour (left, below). One articulated bus can carry 600 people per hour (centre, below). One double deck bus can carry 500 people per hour (right, below). The city already has a large fleet of single deck buses. The city has no experience of operating articulated or double deck buses. The following table sets out the relevant parameters for each type. Bus type Purchase price per bus Operating cost per bus per year in year 1 Single deck Articulated Double deck £260,000 £65,000 £150,000 £50,000 £200,000 £55,000 The buses will be acquired in year 0 and sold at the end of year 8. According the project estimates, their resale value at that point will be 25% of their initial purchase price. The total revenue from passengers will be £13 million per year in years 1 to 4 and £14 million per year in years 5 to 8. Operating costs per bus will rise by 3% per year after year 1. • The required rate of return is 5%. • Inflation is assumed at 2% per year over the period. The project risk factor is 5%. Using this data calculate which type of bus would promise the highest net present value. You may use either the standard NPV formula or the simple formula, but be clear about which you are using. [17 marks] (b) Why would it be unwise to rely entirely on a net present value analysis to decide which type of bus to buy? What other factors do you think would be important in making the decision? [8 marks] (c) Give an example of a situation where you might opt for a project with a negative NPV? [8 marks] 3. (a) The city of Urbano is renewing part of its bus fleet. It has the choice of buying single deck buses, articulated buses or double deck buses. They all use the same drive technology as existing buses. There are lots of factors in deciding which type to go for, but one criterion will be which fleet promises the highest net present value. At peak times the new Urbano buses will have to move 50,000 people per hour. The respective capacities of the different types of bus are: . . One single deck bus can carry 400 people per hour (left, below). One articulated bus can carry 600 people per hour (centre, below). One double deck bus can carry 500 people per hour (right, below). The city already has a large fleet of single deck buses. The city has no experience of operating articulated or double deck buses. The following table sets out the relevant parameters for each type. Bus type Purchase price per bus Operating cost per bus per year in year 1 Single deck Articulated Double deck £260,000 £65,000 £150,000 £50,000 £200,000 £55,000 The buses will be acquired in year 0 and sold at the end of year 8. According the project estimates, their resale value at that point will be 25% of their initial purchase price. The total revenue from passengers will be £13 million per year in years 1 to 4 and £14 million per year in years 5 to 8. Operating costs per bus will rise by 3% per year after year 1. • The required rate of return is 5%. • Inflation is assumed at 2% per year over the period. The project risk factor is 5%. Using this data calculate which type of bus would promise the highest net present value. You may use either the standard NPV formula or the simple formula, but be clear about which you are using. [17 marks] (b) Why would it be unwise to rely entirely on a net present value analysis to decide which type of bus to buy? What other factors do you think would be important in making the decision? [8 marks] (c) Give an example of a situation where you might opt for a project with a negative NPV? [8 marks]
Expert Answer:
Related Book For
Posted Date:
Students also viewed these economics questions
-
1. Why do you suppose that some observers have called for requiring installation of devices that would enable governments to monitor households' energy consumption? 2. Who ultimately pays to address...
-
Why do you suppose that forensic DNA analysis relies principally on short tandem repeats (repeat polymorphisms), rather than single- nucleotide polymorphisms, such as that described on page 669 and...
-
Why do you suppose that choosing other income increments besides $15,000 or $30,000 can yield even more distributional variations of households within these seven income groupings? (What do you think...
-
A strain of E-coli Beu 397-recA441 is placed into a nutrient broth at 30° Celsius and allowed to grow. The data shown in the table are collected. The population is measured in grams and the time...
-
A random sample of size n = 25 from a normal population has the mean x = 47 and the standard deviation = 7. If we base our decision on the statistic of Theorem 8.13, can we say that the given...
-
In this zone, we critically discuss the construct of employee empowerment and evaluate whether it is managerial rhetoric or organisational reality. According to Cunningham et al.,45 the 1980s and 90s...
-
McDonald Consulting, Inc., completed the following transactions during December 2010, its first month of operations: Requirements 1. Open, or set up, T-accounts in the ledger: Cash, Accounts...
-
Why is having multiple health-care plans important for FedEx in slowing down increases in the cost of benefits?
-
Problem 14-3 (Algo) Straight-line and effective interest compared [LO14-2] On January 1, 2024, Reyes Recreational Products issued $100,000, 13%, four-year bonds. Interest is paid semiannually on June...
-
Refer to the information in Exercise 4.16. Suppose that Telemark-Kjemi uses the FIFO method instead of the weighted-average method in all its departments. The only changes under the FIFO method are...
-
A Shaft as bending moment max bending stoess. max foo bending M shown in the fig is subjected to a 550 N/ Detromine $40 M (1/c) R6 . KE. R5. $30 &m. the
-
Graph the first-degree inequalities in two unknowns in Problems 13-48. \(y \leq-2 x+5\)
-
Graph the lines, curves, or half-planes in Problems 1-12. \(x=-\frac{2}{3} y+1\)
-
Refer to the extracts from annual report 2005-06 of the Whirlpool of India Limited regarding its fixed assets, related significant accounting policies and profit/loss on disposal thereof as...
-
A bank manager is worried because the income gap currently equals \($35\) million and interest rates are expected to increase by 1.5%. Determine the amount of rate-sensitive assets if rate sensitive...
-
Draw the graphs in Problems 45-50. \(y=-2 x^{2}+4 x-2\)
-
Choose EITHER a recent good service experience OR a recent bad service experience. Briefly convey the circumstances of the experience in your initial post. Next, discuss which elements of services...
-
Find the inverse, if it exists, for the matrix. -1
-
Take a look at panel (a) of Figure 32-4. On a per-unit basis, how much of the $50-per-unit tariff on imported tablet devices is paid by U.S. consumers? On a per-unit basis, how much of the...
-
1. Why do you suppose that soil, climate, and water conditions are among the key determinants of a region's or nation's comparative advantage in production of agricultural corps? (Keep in mind that...
-
Every 1-percentage-point increase in the marginal income tax rate induces some workers to supply less labor, which cuts real GDP by $0.2 trillion. At the same time, each 1-percentage-point increase...
-
Record the following transactions in the general journal of Dvorak Interiors. Round all amounts to the nearest dollar. Explanations are not required. 2007 Dec. 21 Received a $4,400, 30-day, 9% note...
-
Speedo Paint Company completed the following selected transactions: Requirement Record the transactions in the journal of Speedo Paint Company. Explanations are not required. Using ratio data to...
-
The comparative financial statements of 4th Gear Website Design for 5 2008,2007 , and 2006 include the data shown here: Requirements 1. Compute these ratios for 2008 and 2007 : a. Current ratio b....
Study smarter with the SolutionInn App