A bridge is to be constructed now as part of a new road. The State DOT has deter

Question

A bridge is to be constructed now as part of a new road. The State DOT has determined that traffic density on the new road will justify a two-lane road and bridge at the present time. Because of uncertainty regarding future use of the road, the time at which an extra two lanes will be required is currently being studied. The two lane bridge will cost $2 million and the four-lane bridge, if built at one time, will cost $3.5 million. The cost of widening a two-lane bridge to four lanes will be an extra $2 million plus $250K for every year that construction is delayed. The DOT’s MARR is 12% per year. The below estimates have been made of the times at which the four-lane bridge will be necessary:

Optimistic: 7 years;               Most Likely: 5 years;             Pessimistic: 4 years

In view of these estimates, what would you recommend? What difficulty, if any, do you have in interpreting your results? List some advantages and disadvantages of this method in preparing estimates?

Explanation / Answer

Here we must look at two options

1st option: Construct 2 lane bridge, Initial cost would be $2 million.

2nd Option: Construct 4 lane bridge with cost of $3.5 million but have to get returns of atleast 12%,

Here we have to remember that each additional year of dealay migh lead to cost escalation of $ 0.25 million which is more than Annual MARR of 0.185 million ( 12% of 1.5 million is 0.185 milliomn )

So it is wise to invest in option 2, As the potential losses are more than 12%.

The difficulties we face in taking such decisions is simple, We need to calculate potential losses of not investing not overall investment viability.

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