In addition to annual maintenance cost, the wale; supply dam in Example 15-2 must be renovated every 50 years at a cost of $10 million. What is the effect on PWC of the dam and water conservation alternatives caused by ignoring all costs beyond the 50-year planning horizon? Does the inclusion of perpetual costs change the decision?
Reference: Example 15-2.
A city water department has decided that two alternatives are available to meet the need for an additional 40 million gallons of water per day. One is to build a dam and reservoir, the other is to undertake a strong program of water conservation/education. The dam and related facilities can be constructed over three years at a cost of $20 million in year 1, $10 million in year 2, and $5 million in year 3.Thereafter, maintenance is $0.5 million per year.
The conservation program will cost $5 million the first year, $4 million the second year, and $3 million the third year. Thereafter, $2 million per year will have to be spent to maintain low water use.
The planning horizon for both alternatives is 50 years; any costs beyond this length of time are ignored, and an interest rate of 7% is to be used. Which alternative should be undertaken?
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