based on the estimated costs and benefits, and now considering all possible investments together as one integrated capital program, choose the best Freight Rail alternative and the best Passenger Rail alternative under the following total budget constraints. Explain briefly how you arrived to these answers.1. $5 million2. $10 million3. $15 million 4. $20 million The Mayor of Chicago is evaluating two rail transportation projects. The first project involves locomotive modifications to enhance fuel efficiency in the regional freight rail network, with benefits deriving from fuel cost savings. The second project focuses on passenger rail infrastructure improvements, such as adding tracks at congested locations, with anticipated boosts in ticket and pass sales. Both projects offer 30-year benefits, and financing can be secured at a 7% annual rate. The initial costs and monthly benefits for each alternative are detailed below:**Freight Rail Network:**| Alternative | Investment ($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 |The "do-nothing" alternatives (F0* and P0*) represent scenarios with no investment or benefits for the respective networks. Only financial terms are considered in this analysis.

Calculation of Cost-Benefit Ratio: Total Present Value of Benefits/ Investment Cost Freight Rail…

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 (SK) Monthly Benefit ($K) Alternative F0* F1 3,000 6,000 9,000 12,000 24.95 F2 56.56 79.84 89.82 F3 F4 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |(SK) PO* 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 P1 P2 P3 P4

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 (SK) Monthly Benefit ($K) Alternative F0* F1 3,000 6,000 9,000 12,000 24.95 F2 56.56 79.84 89.82 F3 F4 Passenger Rail Network Monthly Benefit ($K) Investment Alternative |(SK) PO* 3,000 6,000 9,000 12,000 29.94 51.56 66.53 73.18 P1 P2 P3 P4

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Assume that the manager faces a capital budget constraint with respect to total dollars available today to invest in new projects, $46 million. Assume same WACC for each project. All else equal, which project or set of otherwise independent projects should the manager choose? Project NPV (in $millions) IRR Required Investment today A $ 10 14.0% $ 22 B $ 9 12.9% $ 23 C $ 11 14.1% $ 23
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