Compare the following bridge designs using present worth analysis and choose the

Question

Compare the following bridge designs using present worth analysis and choose the best option. Draw cash flow diagram for the 2 year construction effort only (not the 100 years of operation following ribbon cutting). Use i=2%. Material for Bridge A, purchased at year 0=$ 15 million Material for Bridge B, purchased at year 0= $20 million Salvage value for replaced Bridge, received art end of year 0=1M Labor for Bridge A construction, annual cost=$1 million Labor for Bridge B construction, annual cost=$1.5 million Annual Economic Benefit of Bridge A, after completion and 100 years into the future=$250,000 Annual Economic Benefit of Bridge B, after completion and 100 years into the future=$500,000 Further hindering the construction effort, a worker was killed on the first day of construction when crushed by a swinging section of bridge. The family is requiring a memorial plaque for the slain worker be placed at the midspan of the bridge. The yearly maintenance of the memorial will cost 10,000 and extend on into perpetuity what principal must be set aside to cover the maintenance expenses given a 6% interest rate? If the construction company decides to build the costs into their operating expenses while the bridge is being construction, what is the value of that annual increase to expenses?

Explanation / Answer

Solution:-

Given I =2% i.e. 0.02.

Particulars

Bridge A ($ millions)

Bridge B (($ millions)

Material

15

20

Labour

1

1.5

Economic Benefit p.a.

0.25

0.5

Memorial Cost = 10000 I = 6%

An operating expense, operating expenditure, operational expense, operational expenditure is an ongoing cost for running a product, business. It is an ongoing expense incurred in routine business. It includes selling, distribution and administration cost.

OPEX = SC + DC + AC.

Particulars

Bridge A ($ millions)

Bridge B (($ millions)

Material

15

20

Labour

1

1.5

Economic Benefit p.a.

0.25

0.5

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