Problem

A Midwestern state is considering building a stretch of 2-lane toll highway between two points. It will cost $2 million and will bring an annual toll revenue of $300,000 a year. The cost of operation and maintenance will be $6,000 annually. If they build a 4-lane divided highway, the cost will be $3 million but will increase the toll revenue to $410,000 a year. The cost of maintenance and operation of the 4-lane highway will be $10,500 a year. They use a 15 year analysis period and 9% MARR. Should they build a 4-lane or a 2-lane or a 2-lane highway? Perform the financial analysis using the rate of return method.