Reference no: EM132636884

A flood control project is being planned. There are two alternatives being considered for project development.

Alternative 1: Spend $300K now.

Alternative 2: Spend $250K now, then expand at year 10 for $55K.

• Annual maintenance under both alternatives will be $8K per year. Rehabilitation and overhaul must be performed every 10 years at a cost of $30K. For alternative 2, the rehabilitation would not be required in the year of the expansion. Project life is 50 years with a salvage value of $60K under both alternatives. The applicable interest rate is 6%

Question 1. Calculate the present worth of both alternatives 1 and 2. Based on the economic analysis, which is preferred? Hints: Ask yourself "Does it make sense to do the rehabilitation and overhaul at the end of the project life?" Also, carefully consider cash inflows versus outflows.

Question 2. For Alternative 1, what would the capitalized cost be if the project were considered to extend indefinitely rather than a 50 year life? (Calculate the present worth of each component separately and add them.) Hints: Maintenance and Rehabilitation/overhaul go on indefinitely. There would not be a salvage value as there is no end to the project.

Question 3. For alternative 1, extended indefinitely, what would the capitalized cost be if the maintenance cost increased by 0.1K per year?

Question 4. For alternative 1, extended indefinitely, what would the capitalized cost be if the maintenance costs increased by 3% each year?