Building a Bridge - 4

Quantitative Finance Level 2

You are the project manager of a construction company. You are considering building a bridge across the river. You estimate that the construction project will take 3 years, with $10 million due each year. Upon completion of the project, the tolls collected from the bridge will be valued at $4 million per year. It is estimated that the bridge will last for 10 years, before it will need to be replaced. The cost of dismantling the bridge will be offset by the price of the reclaimed materials.

Assume that the discount rate is 5% per year. The Net Present Value is calculated in the 0th year.

4) What is the Net Present Value of the revenue that is generated by the bridge from the 4th to 13th year?

$26.42 million $30.89 million $26.68 million $40 million

2 solutions

Chew-Seong Cheong
Mar 26, 2015

Use the following Excel spreadsheet to solve for the Net Present Value of the revenue:

Key in A2: 4 and A3: 5; highlight A2:A3 and drag down to A11
Key in B2: 4 and B3: =B2
Key in C2: 1/1.05^A2; highlight C2 and drag it to C3
Key in D2: B2*C2; highlight D2 and drag it to D3
Highlight B2:D2 and drag it to B11:D11
Key in D12: SUM(D2:D11)

Alternatively, just key in:

D13: =NPV(5%,0,0,0,4,4,4,4,4,4,4,4,4,4)

The answer is $\boxed{\$26.68}$ million

Venture Hi
Mar 25, 2015

NPV=4/(1+0.05)^4+4/(1+0.05)^5+4/(1.05)^6+4/(1.05)^7+4/(1.05)^8+4/(1+0.05)^9+4/(1+0.05)^10+4/(1.05)^11+4/(1.05)^12+4/(1.05)^13

Building a Bridge - 4

2 solutions

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