The city engineer is considering three alternatives for supplementing the city’s

ID: 1167499 • Letter: T

Question

The city engineer is considering three alternatives for supplementing the city’s water supply. The first alternative is to continue to deep well drill at a cost of $10,500 per year. The second alternative is to install an 18-inch pipeline from a surface reservoir. First year cost is $25,000 and annual pumping cost is $7,000. The third alternative is to install a 24 inch pipeline from the reservoir at a first year cost of $34,000 and annual pumping cost of $5000. The life of each alternative is 20 years. For second and third alternatives, salvage value is 10 percent of first year costs. Using a cost of capital of 8 percent and PW analysis determine which the PW of each and select which alternative should be selected?

Explanation / Answer

Year

Deepwell

18” pipeline

24” pipeline

-25000

-34000

1-20

-10500

-7000

-5000

+2500

+34000

Present worth of the cost of 18” pipeline will be

=-25000-7000(P/A8%,20)=-$93,190

Present worth of the cost of 24” pipeline will be

=-34000-5000(P/A8%,20)=-$82,361

Present worth of the cost of Deepwell will be

=-10500(P/A8%,20)=-$103,089

The present worth is the hghest in case of 24” pipeline, so the engineer should chose 24” pipeline.