Question

In: Economics

Show all work. Use a MARR of 2% ! The cost projections for two alternatives for...

Show all work. Use a MARR of 2% !

The cost projections for two alternatives for a proposed bridge are provided below. Which alternative would you recommend in order to minimize cost? (Use a MARR of 2%)

	A	B
Initial Construction costs	$ 15,000,000.00	$ 45,000,000.00
Annual Maintenance Costs	$ 3,750,000.00	$ 2,000,000.00

Expert Solution

Present value of maintenance cost should be calculated first.

Alternative A:

Since the number of years is not gives, present value for perpetuity should be applied here.

Present value of maintenance cost = Annual cost / MARR

= 3,750,000 / 0.02

= $187,500,000

Total cost = Present value + Initial cost

= 187,500,000 + 15,000,000

= $202,500,000

Alternative B:

Since the number of years is not gives, present value for perpetuity should be applied here.

Present value of maintenance cost = Annual cost / MARR

= 2,000,000 / 0.02

= $100,000,000

Total cost = Present value + Initial cost

= 100,000,000 + 15,000,000

= $115,000,000

Total cost is the minimum for alternative B.

Recommendation: B is recommended, since its cost is the minimum.

Rahul Sunny answered 2 years ago

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