Question

A bi-level Entertainment center is under construction. Installation of only 4 escalators is planned at the start although the ultimate designs calls for 10. The question anses whether to provide necessary facilities that would permit the installation of the additional escalators (e.g. stair supports, wiring conduits, and motor foundations) at the mere cost of their purchase and installation now or to defer investment in these facilities until the escalators need to be installed. The two options are detailed as follows:

Option 1: Provide these facilities now for all six futures escalators at $250,000

Option 2: Defer the investment as needed. Instalation of two more escalators is planned in three years, two more in seven years, and last two in ten years. The installation of these facilities at the time they are required is estimated cost $220,000 in year 3, $240,000 in year 7 and $260,000 in year 10.

For both options, additional annual expenses are estimated at $500 for each escalator facility installed. Assume the company's MARR is 15%

What the present worth of Option 1?

What the present worth of option 2?

Answer 1

As shown in calculation below net present value of cost in option 1 is lower than that in option 2

So he should go for option 1

Prsent worth of option is 275,094

Present worth of option 2 is 318,191