A city has developed a plan to provide for future municipal water needs. The plan proposes an aqueduct that passes through 150 meters of tunnel in a nearby mountain. Two alternatives are being considered. The first proposes to build a full-capacity tunnel now for $556 000. The second proposes to build a half capacity tunnel now and a second identical half-capacity tunnel in 20 years. Each of half capacity tunnel costs $402 000. The maintenance cost of the tunnel lining for the full-capacity tunnel is $40 000 every 10 years, and for each half-capacity tunnel it is $32 000 every 10 years. The friction losses in the half-capacity tunnel will be greater than if the full-capacity tunnel were built. The estimated additional pumping costs for each half-capacity tunnel will be $2 000 per year. Using present worth method and a 7% interest rate, which alternative should be selected? Give typing answer with explanation and conclusion
A city has developed a plan to provide for future municipal water needs. The plan proposes
an aqueduct that passes through 150 meters of tunnel in a nearby mountain. Two
alternatives are being considered. The first proposes to build a full-capacity tunnel now for
$556 000. The second proposes to build a half capacity tunnel now and a second identical
half-capacity tunnel in 20 years. Each of half capacity tunnel costs $402 000. The
maintenance cost of the tunnel lining for the full-capacity tunnel is $40 000 every 10 years,
and for each half-capacity tunnel it is $32 000 every 10 years.
The friction losses in the half-capacity tunnel will be greater than if the full-capacity tunnel
were built. The estimated additional pumping costs for each half-capacity tunnel will be
$2 000 per year. Using present worth method and a 7% interest rate, which alternative
should be selected?
Give typing answer with explanation and conclusion
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