Reference no: EM131867725

A city has developed a plan which will provide for future municipal water needs. The plan proposes an aqueduct which passes through 500 ft 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 (cost=$402,000) which should be adequate for 20 years, and then build a second parallel half-capacity tunnel (cost = $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. However, the friction losses in the half-capacity tunnel will be greater than if the full-capacity tunnel were built. The additional pumping costs in a single half-capacity tunnel will be $2000 per year, and for two-half capacity tunnels it will be $4000 per year. Based on an expected life of 50 years (no lining maintenance at 50 years), using equivalent uniform annual costs analysis and an interest rate of 7%, which alternative should be chosen?