Question
A 50-meter tunnel must be constructed as part of a new aqueduct system for a city. Two alternatives are being considered. One is to build
A 50-meter tunnel must be constructed as part of a new aqueduct system for a city. Two alternatives are being considered. One is to build a full-capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then to build a second parallel half-capacity tunnel 20 years hence for $400,000. The cost of repair of the tunnel lining at the end of every 10 years is estimated to be $20,000 for the full-capacity tunnel and $16,00 for each half-capacity tunnel.
Determine whether the full-capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem by B/C ratio analysis using a 5% interest rate and a 50-year analysis period. There will be no tunnel lining repair at the end of the 50 years.
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