Question

Government has two (2) plans to deal with their water supply problem. Option 1 is to build a complete water pumping plant costing P 2 Billion, which would meet all needs during the 1st 30 years. Annual maintenance costs are estimated to be at P 2 Million for the 1st 15 years and P 3 Million for the succeeding 15 years. Option 2 is to build a partial water pumping plant at a cost of P 1.25 Billion, which would be sufficient for the 1st 15 years. At the end of 15 years, the pumping plant will be completed at an estimated cost of P 1.5 Billion. Annual maintenance cost is P 1.5 Million during the 1st 15 years and P3 Million for the succeeding 15 years. At 8% interest, which plan would you recommend?

Answer 1

4.30M (+ 0.08 4 54.30 mx 11.08) 172.24M So Net amt the to be paid for ist optim 20.13B + 81.45M + 172• 24M 20.38 B For lotion 2 Cal calation Interst and total amt to be paid after. Boyears. For 1.25 B for 30 years 30 A = 1.25B: U+0.08 12.58 B For I.SB for 15 yrs. A = 1.5B (1+0.08) 15 4.75B

15yrs. Interest on anzual maintainence for Ist, '1+0.08) - 1.5m 0.08 1:58. (1.08) - 1 1:08) - 40.73M But in terrest on this amt forneaf 15yrs be paid will also 15 40.73M 1 +0.08 129.20m Now interest on annual maintenance for next 15 years 3 m (1 +0.08) - 1 13 0.08 81.46M

so, total amount to be paid after 30 years 4.75B + 12.58B+ 40 129.2014 + 81.46M 17.54B So, optim option 2 is more optimum