A contractor has a contract to construct a 3,600-metre-long tunnel in 30 months. He is trying to decide whether to do the job with his own forces or subcontract the job. You are to calculate the equivalent monthly cost under each alternative. His i 5 1.75% per month. Production under both alternatives will be 120 metres per month.

A lternative A: Buy a tunnelling machine and work with own force

a. C ost of tunnelling machine 5 ` 20,000,000

b. S alvage value of machine at end of month 30 5 ` 4,000,000

c. C ost of labour and material = ` 10,000/m for the first 10 months, and increasing by 0.5% per month at EOM each month thereafter (i.e., ` 10,050/m at EOM11, ` 10,100.25 at EOM 12, etc.)

A lternative B: Subcontract the work C ost is ` 27,000 per metre of tunnel