Wayne County will build an aqueduct to bring water in from the upper part of the

Question

Wayne County will build an aqueduct to bring water in from the upper part of the state. It can be built at a reduced size now for $300 million and be enlarged 25 years hence for an additional $350 million. An alternative is to construct the full - s ized aqueduct now for $400 million. Both alternatives would provide the needed capacity for the 50 - year analysis period. Maintenance costs are small and may be ignored. At 6% interest, which alternative should be selected?

a.Do nothing

b.Two Stage Construction (reduced)

c.One Stage Construction (full)

Explanation / Answer

For two stage construction:

PW of cost = $300 million + $350 million (P/F,6%,25) = $350 million + $81.6 million = $381.6 million

For single stage construction:

PW of cos = $400 million

As present worth of cost of second stage construction is low hence it is more preferrable.

Option b is correct.

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