Interest rate: 10% Alternitive A (tunnel) Initialcost: $8,000,000 Economic life:

Question

Interest rate: 10% Alternitive A (tunnel)    Initialcost:         $8,000,000    Economic life:   100years    O&M:              $55,000/year Alternitive B(canal)    Initial cost offlume:      $900,000    Economic life of flume:   50years    Initial cost of canal (excludinglining)   $1,000,000    Economic life of canal:   100years    Initial cost of concrete canallining:   $550,000    Economic life of lining:   20years    Salvage (reuse) value of canal lining:$25,000    O&M: $120,000/year Determine: (1) Present worth of each alternitive. Note: Do the exersise entirely on a present worth basis, not on anannualized basis. Convert each cost component to its presentworth and then sum to get the total present worth of eachalternitive. (2) Best alternitive from an economic perspective. Interest rate: 10% Alternitive A (tunnel)    Initialcost:         $8,000,000    Economic life:   100years    O&M:              $55,000/year Alternitive B(canal)    Initial cost offlume:      $900,000    Economic life of flume:   50years    Initial cost of canal (excludinglining)   $1,000,000    Economic life of canal:   100years    Initial cost of concrete canallining:   $550,000    Economic life of lining:   20years    Salvage (reuse) value of canal lining:$25,000    O&M: $120,000/year Determine: (1) Present worth of each alternitive. Note: Do the exersise entirely on a present worth basis, not on anannualized basis. Convert each cost component to its presentworth and then sum to get the total present worth of eachalternitive. (2) Best alternitive from an economic perspective.

Explanation / Answer

Adding all costs, the logical decision is to build a tunnel, which will cost $13.5 million as opposed to $22.975 million for a canal, during their entire lifetimes.  I'm not sure if by "worth" something other than money, but as far as decisions go, the proper alternative is A.

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