Reference no: EM131507432

A consulting engineer has been hired to advise a town how best to proceed with the construction of a 200,000-m³water supply reservoir. Since only 120,000-m³ of storage will be required for the next 25 years, an alternative to building the full capacity now is to build the reservoir in two stages. Initially the reservoir could be built with 120,000-m³ of capacity and then, 25 years hence, the additional 80,000-m³ of capacity could be added by increasing the height of the reservoir. If interest is computed at 4%, which construction plan is preferred?

Construction Cost

Annual Maintenance Cost

Build in two stages:

First stage: 120,000-m³ reservoir $14,200,000 $75,000 maintenance

Second stage: Add 80,000-m³ of capacity; additional construction and maintenance costs $12,600,000 $25,000 maintenance

Build full capacity now:

200,000-m³ reservoir

$22,400,000

$100,000 maintenance