Two sites are currently under consideration for a bridge over a small river. The

Question

Two sites are currently under consideration for a bridge over a small river. The
north site requires a suspension bridge. The south site has a much shorter span,
allowing for a truss bridge, but it would require new road construction.
The suspension bridge will cost $500 million with annual inspection and
maintenance costs of $350,000. In addition, the concrete deck would have to be
resurfaced every 10 years at a cost of $1,000,000. The truss bridge and approach
roads are expected to cost $250 million and have annual maintenance costs of
$200,000. This bridge would have to be painted every 3 years at a cost of
$400,000. In addition, the bridge would have to be sandblasted every 10 years
at a cost of $1,900,000. The cost of purchasing right-of-way is expected to be
$20 million for the suspension bridge and $150 million for the truss bridge.
Compare the alternatives on the basis of their capitalized cost if the interest rate
is 6% per year.

For this question, why the textbook solution won't calculate the painitng cost (400k) at the 6th year?

Explanation / Answer

PRESENT WORTH ANALYSIS • So Far, Present worth computations have been made for one project or alternative. • In chapter 5, techniques for comparing two or more mutually exclusive alternatives by the present worth method are treated. • We will also cover, Future Worth analysis, capitalized cost, payback period, and bond analysis which all use present worth relations to analyze alternatives.

Section 5.1: Mutually Exclusive Alternatives • One of the important functions of financial management and engineering is the creation of “alternatives”. • If there are no alternatives to consider then there really is no problem to solve! • Given a set of “feasible” alternatives, engineering economy attempts to identify the “best” economic approach to a given problem. • Part of Engineering Economy is the selection and execution of the best alternative from among a set of feasible alternatives.

Two Location Alternatives, A and B where one can lease one of two locations. Location A Location B First cost, $ -15,000 -18,000 Annual lease cost, $ per year -3,500 -3,100 Deposit return,$ 1,000 2,000 Lease term, years 6 9 Note: The lives are unequal. The LCM of 6 and 9 = 18

Calculation for A and B -18 yrs • PWA = -15,000 - 15,000(P/F,15%a,6) + 1000(P/F,15%,6) – - 15,000(P/F,15%,12) + 1000(P/F,15%,12) + 1000(P/F,15%,18) - 3500(P/A,15%,18) = $-45,036 • PWB = -18,000 - 18,000(P/F,15%,9) + 2000(P/F,15%,9) + 2000(P/F,15%,18) - 3100(P/A,15 %,18) = $-41,384

In some applications, management may prefer a future worth analysis; • Analysis is straight forward: • Find P0 of each alternative: • Then compute Fn at the same interest rate used to find P0 of each alternative. • For a study period approach, use the appropriate value of “n” to take forward

Tabular Analysis for PB Cash Flow P/F,i%,t Dis. Incmnt Accum Disc. Amts E.O.Y. (1) C.C.Flow (2) (3)=(1)(2) (4)=Cuml. Sum of (3) 0 -$10,000.00 -$10,000.00 1.00000 -$10,000.00 -$10,000.00 1 $2,000.00 -$8,000.00 0.92593 $1,851.85 -$8,148.15 2 $6,000.00 -$2,000.00 0.85734 $5,144.03 -$3,004.12 3 $8,000.00 $6,000.00 0.79383 $6,350.66 $3,346.54 4 $4,000.00 $10,000.00 0.73503 $2,940.12 $6,286.66 5 $1,000.00 $11,000.00 0.68058 $680.58 $6,967.25

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