Fundamentals of Transportation/Evaluation/Solution

 Solution: Convert everything to Present Value and see just how great a deal this is.

For the present value of the $5,000,000 benefit (gas reduction):

$$ P = \frac{F} = \frac{$5,000,000} = $3,720,469.57 \,\!$$

The benefit in present-day value is $3,720,469.57.

For the money (cost) being sent to the contractor, a payment of $470,000 per year, the present value would be:

$$ P = A\left[ {\frac} \right] = $470,000\left[ {\frac} \right] = $4,009,195.33 \,\!$$

The cost in present-day value is $4,009,195.33. Therefore, this detail, while shiny in appearance at first, is NOT a wise decision, since costs exceed benefits.

/Solutions