The B.C. Port Authority is considering acquiring a new ferry at a cost of $122 million. Equal payments are to be made annually over 40 years and the implied interest rate is 5%.
Required:
(a) Calculate the annual payment, assuming the first payment is made the day the purchase agreement is signed.
(b) Calculate the annual payment, assuming the first payment is made one year after the purchase agreement is signed.
(c) If the ferry carries 310,000 passengers per year and charges $20 per ride, calculate the present value of the revenue stream. To simplify the calculations, assume the money is collected at year-end every year.
(d) Does the acquisition of the new ferry make economic sense? Explain.