Reference no: EM133065205

A 50-meter tunnel must be constructed for a new city aqueduct. One alternative is to build a full-capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then build a second parallel half-capacity tunnel 20 years hence for $300,000. Each tunnel must be relined every ten years, at a cost of $20,000 for the full-capacity tunnel and $16,000 each for the half-capacity tunnels.

Determine whether the full-capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem using conventional benefit-cost ratio analysis, a 4% interest rate, and a 50-year analysis period. No reline will be required at year 50.