The transit authority wants to increase its bus services. The transit authority would purchase 300 new energy-efficient buses. They would replace the 150 buses now in operation, doubling the size of the transit system. At a unit cost of $800,000 for each bus, the total expenditure would be $240 million. The projected salvage value of the old buses is $20,000 per bus, leaving $237 million to be financed by the transit authority. .The transit authority would purchase the buses, financing the purchase through borrowing. Assume a spread of 200 basis points over the revenue bond interest rate (which is 2.27%). However, because the transit authority is expecting to buy buses for transit authorities across the country, it expects to receive a 3% volume discount from the purchase price.
Required:
a. Calculate the annual debt service cost for the transit authority.