Question : Your state considering putting in a toll road and issuing
Your state is considering putting in a toll road and issuing a revenue bond to fund it. Your state currently has a AAA rating and your research shows that similar state bonds are paying a 4% coupon rate. The toll road is estimated to require a 2-million-dollar investment upfront and an additional $100,000 every other year in maintenance fees but it should generate $200,000 in revenues for at least 10 years.
Would you recommend using the NPV or IRR methodology to evaluate this project? Why?
Assuming that the only relevant opportunity cost of capital is the 4% coupon on the bond issue, use your chosen methodology to evaluate and make a recommendation on the project.
Why is assumption in b potentially problematic?