The city of Middleville is considering offering public bus service. Setting up the service will cost the city $1.6M (where M stands for million). The useful life of the buses is 18 years. Annual maintenance of the buses would cost $142,000 per year and they would need a major overhaul in year 11 that will cost a total of $880,000. This overhaul is in addition to the annual maintenance. Annual labor and administrative costs will begin at $165,000 in year 1 and grow at 2.0% per year thereafter. The buses will generate a revenue of $250,000 in year 1 and it will grow at 4.0% per year thereafter. Reduced parking requirements and other benefits generated by the project will save the city $325,000 per year. The salvage value (price the city can get in the future after maintenance) of the used buses in year 18 is expected to be $420,000. What is the NPV of the bus proposal? The city does not pay taxes and the discount rate is 7.7%. Assume that all cash flows except initial investments happen at the end of the year and you are strongly encouraged to use a spreadsheet to solve this problem.
A) $1,610,340.50
B) $1,110,695.76
C) $1,221,196.86
D) $1,262,224.64
