Civil Engineering Reference
In-Depth Information
The toll receipts (see the benefits column in table 7.2) start arriving
in the fourth year, the year in which the bridge opens. Since the bridge
is urban and operating at moderate speeds, we're projecting that, during
a peak traffic hour, about 1500 cars cross. The rest of the day has fewer
cars, adding up to an estimated daily average of 6850 (the average includes
the lower traffic on weekends and holidays). At a one-dollar toll for this
many vehicles (with no special estimate made for trucks and buses) over
365 days, the annual revenue is $2.5 million, an amount assumed to stay
identical for 30 years.
The net annual cash flow, shown in the third column, is then the
sum of costs and benefits, which turns out to be negative during construc-
tion years and during the 15th and 25th years (repair and repainting), but
positive, reflecting a healthy toll income, for the other 28 years. Prospects
for our bridge look pretty good, as long as we remember that estimates are
just that—they're estimates meant for discussion, questioning, and revision.
THE DISCOUNT RATE AND PRESENT VALUE
Questions of whether to build or not to build public works are capital invest-
ment issues. Private firms face similar investment problems when they have
to decide whether to build a building, buy a machine, or start a new product
line. A distinguishing feature that makes them “capital investment” is that
decisions must be made about the asset now, though costs, benefits, and
risks from that asset flow back over years. For our arch bridge investment,
they flow back over three years of construction and thirty years of service.
In the United States, expensive transportation infrastructure projects
are usually paid for, in large part, with state and federal funds. But, to keep
things simple, we will assume that our hypothetical city itself pays for the
bridge. So our mayor has in front of him a bridge-financing problem. The
year's tax receipts have to pay for regular expenditures, like police protection
and street cleaning, not to mention his salary. It is not fair to ask residents
to try to pay for the bridge from current tax revenues, since people includ-
ing those yet unborn will be using the bridge for decades. It makes sense
to borrow the money and pay for it over the structure's life span. Fairness
aside, the year's municipal budget has nowhere near enough money for a
bridge anyway.
The mayor now has to decide (that's another simplification, as if city
councilors and various interest groups were pawns in his hands) whether to
go ahead and borrow money for the prompt start of construction next Janu-
ary 1. He inspects table 7.2 but only takes the time to look at the columns
labeled “costs,” “benefits,” and “net cash flow.” “This is a great project!” he
says. Total project costs plus operations and maintenance over 30 years add
