Question

Two infrastructure project alternatives are available to transport water from a reservoir to town

– Option A involves building a 10-mile long gravity pipeline

– Option B involves building an 8-mile long pipeline and a pumping station

• Given an MARR of 7%, which option is more economic in 10, 20, and 30 years?

Initial pipeline cost: option A $2.8 million, option B $1.5 million.

Pumping Station cost: option A $0, option B $500,000.  

Annual operation and maintenance cost: option A $30,000, option B $60,000.

Annual power costs during first 10 years: option A $0, option B $40000.

Annual power costs after 10 years: option A $0, option B $120000.

Answer 1

For Option A:

Initial Cost (PV)=$-2.8 million, annual cost (PMT)=$30000, nper=10/20/30, rate=7%

For Option B,

Initial Cost =1.5+0.5=$2.0 million, annual cost for first 10 year=40k+60k=$100000 and after 10 year=60k+120k=$180000

Below is the calculation for Future value of cost incurred for Project A and Project B

Hence we can see that for the first 10 year future value of cost for Project A is more than Project B.

Hence, Project B is more economical for first 10 year.

However, future value of cost after 20 year and 30 year is more for project B than A

Hence, after 20 and 30 year project A is more economical.