The Mayor of Chicago is considering two rail transportation projects that you have been asked to evaluate. The first project is for locomotive modifications to improve fuel efficiency across the Chicago regional freight rail network. The project benefits come from fuel cost savings. The second investment project is for Chicago passenger rail infrastructure enhancements such as adding second set of tracks at congested network locations. The Mayor assumes this increased capacity will boost ticket and pass sales and those benefits are shown below. Both projects would provide benefit to the city for the next 30 years. Based upon the level of investment risk, the city Treasurer has suggested that financing could be secured at an annual rate of 7%. A number of alternatives have been developed for each project. The lump sum of the initial cash outlay and the ongoing monthly benefits have been estimated for each alternative and are shown in the following tables: Freight Rail Network Investment Monthly Benefit ($K) Alternative (SK) F0* 24.95 56.56 79.84 89.82 F1 F2 F3 F4 3,000 6,000 9,000 12,000 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |($K) PO* P1 P2 P3 P4 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 FO* and PO* are the "do-nothing" alternatives for the Freight and Passenger Networks respectively. For parts a, b, and e consider only the costs and benefits that have been converted to dollar terms. a) Which, if any, of these alternatives are simply not justified?
The Mayor of Chicago is considering two rail transportation projects that you have been asked to evaluate. The first project is for locomotive modifications to improve fuel efficiency across the Chicago regional freight rail network. The project benefits come from fuel cost savings. The second investment project is for Chicago passenger rail infrastructure enhancements such as adding second set of tracks at congested network locations. The Mayor assumes this increased capacity will boost ticket and pass sales and those benefits are shown below. Both projects would provide benefit to the city for the next 30 years. Based upon the level of investment risk, the city Treasurer has suggested that financing could be secured at an annual rate of 7%. A number of alternatives have been developed for each project. The lump sum of the initial cash outlay and the ongoing monthly benefits have been estimated for each alternative and are shown in the following tables: Freight Rail Network Investment Monthly Benefit ($K) Alternative (SK) F0* 24.95 56.56 79.84 89.82 F1 F2 F3 F4 3,000 6,000 9,000 12,000 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |($K) PO* P1 P2 P3 P4 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 FO* and PO* are the "do-nothing" alternatives for the Freight and Passenger Networks respectively. For parts a, b, and e consider only the costs and benefits that have been converted to dollar terms. a) Which, if any, of these alternatives are simply not justified?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The Mayor of Chicago is evaluating two rail transportation projects. The first project involves locomotive modifications to enhance fuel efficiency in the Chicago regional freight rail network, with benefits primarily from fuel cost savings. The second project focuses on expanding capacity for the Chicago passenger rail network by adding tracks in congested areas, aiming to increase ticket and pass sales.
Both projects promise benefits over the next 30 years. Given the investment risks, an annual financing rate of 7% is considered. The tables below summarize the initial investment and the projected monthly benefits for each alternative:
### Freight Rail Network
| Alternative | Investment ($K) | Monthly Benefit ($K) |
|-------------|------------------|----------------------|
| F0* | 0 | 0 |
| F1 | 3,000 | 24.95 |
| F2 | 6,000 | 56.56 |
| F3 | 9,000 | 79.84 |
| F4 | 12,000 | 89.82 |
### Passenger Rail Network
| Alternative | Investment ($K) | Monthly Benefit ($K) |
|-------------|------------------|----------------------|
| P0* | 0 | 0 |
| P1 | 3,000 | 29.94 |
| P2 | 6,000 | 51.56 |
| P3 | 9,000 | 66.53 |
| P4 | 12,000 | 73.18 |
**Note**: F0* and P0* represent the "do-nothing" options for the Freight and Passenger Networks, respectively.
For questions a, b, and c, consider only the monetary costs and benefits.
**Question (a)**: Which, if any, of these alternatives are simply not justified?
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