Question

Problem 08.028- Determine which permanent project to select based on incremental cash flows Two roadway designs are under consideration for access to a permanent suspension bridge. Design 1A will cost $2.6 million to build and $325,000 per year to maintain. Design 1B will cost $3.4 million to build and $40,000 per year to maintain. Both designs are assumed to be permanent. Use an AW-based rate of return equation to determine (a) the breakeven ROR and (b) which design is preferred at an MARR of 15% per year. a) The breakeven ROR is [ %. b) At an MARR of 15% per year, design [1B is preferred.

Answer 1

a.

a.

Let the breakeven ROR be i%, then

EUAC of Design 1A = 2600000 * i + 325000

EUAC of design 1B = 3400000 * i + 40000

As per given condition

2600000 * i + 325000 = 3400000 * i + 40000

(3400000 - 2600000)* i = 325000 - 40000

800000 * i = 285000

i = 285000 / 800000 = 0.35625 ~ 35.63%

b. When MARR = 15%

EUAC of design 1A = 2600000 * 0.15 + 325000 = 715000

EUAC of design 1B = 3400000 * 0.15 + 40000 = 550000

As the EUAC of design 1B is lower, it should be selected