A relocation of a short stretch of rural highway feeding into Route 390 northwest of Dallas is to be made to accommodate new gro
wth. The existing road is now unsafe, and improving it is not an alternative. Alternate new route locations are designated as East and West. The initial investment by government highway agencies will be $3,650,000 for East and $5,000,000 for West. Annual highway maintenance costs will be $120,000 for East and $90,000 for the shorter location West. Relevant annual road user costs, to be treated as disbenefits, considering vehicle operation, time en route, fuel, safety, mileage, and so on, are estimated as $880,000 for East and only $660,000 for West. Assume a 20-year service life and i = 7% / year. Compute the incremental B/C ratio and decide whether East or West should be constructed.
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Answer:
The correct answer is 8.679%.
Explanation:
According to the scenario, the given data are as follows:
Face value (F) = $1,000
Bond value (B)= $955
Time (t) = 18 years
Yield (r) = 9.2%
First we calculate the coupon payment:
Let coupon payment = C
then,
B = C ×
By putting the value, we get
$955 = C×
$955 = C × 8.64 + 205.11
C = 86.79
So, Coupon Rate = Coupon Payment ÷ Face value
= 86.79 ÷ 1000
= 0.08679
= 8.679%