Reference no: EM131807150

A city has developed a plan to provide for future municipal water needs. The plan proposes an aqueduct that passes through 500 feet 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 to build a second parallel half-capacity tunnel. The maintenance cost of the tunnel lining for the fullcapacity tunnel is $40,000 every 10 years, and for each half-capacity tunnel it is $32,000 every 10 years. The friction losses in the half-capacity tunnel will be greater than if the full-capacity tunnel were built. The estimated additional pumping costs in the single half-capacity tunnel will be $2000 per year, and for the two half-capacity tunnels it will be $4000 per year. Based on capitalized cost and a 7% interest rate, which alternative should be selected?