Question 1: LCC You are a manager choosing between two designs for new capital facilities. Given the facts below, calculate the LCC for each alternative and make a recommendation.

For each alternative: The time horizon is 30yrs. Real interest rate is 3% Nominal interest rate is 7% Assume the cash flows are EOY cash flows and happen once per year starting at year 1. Each alternative has a construction duration of 2 years. Construction costs incur as equivalent uniform annual cost over the construction duration. There is no salvage value for each alternative design. o *Note. Salvage value is NOT residual value check notes The bank is providing a loan at 8% compounded annually for the construction costs. o There are no payments on the loan during the construction period. o You must pay pack the loan in 15 equal installments starting at year 3. The loan finance rate will be 8%.

Alternative One Construction cost is $4 million USD, including Energy usage is natural gas and electrical: o Projected annual natural gas use is $16,500 o Projected annual electricity use is $7,000 The mechanical system has the following parameters: o Lifespan is 35 years starting at the service date (The first use is incurred at year 3, because it has been in service for 1 year.) o Initial cost is $350,000 (which is included in the $4 million construction cost) Operations and maintenance are $125,000 per year (not including energy)

Alternative Two Construction cost is $4.4 million Energy usage is natural gas and electrical o Projected annual natural gas use is $12,000 o Projected annual electricity use is $5,000 HVAC o Lifespan is 20 years starting at the service date o The original costs are included in construction costs. o The estimated replacement cost is $375,000 Other elements of the mechanical systems (everything except HVAC) o Initial cost of $50,000 (included in the constructions costs) o Lifespan of the mechanical system is 35 years starting at the service date o There is a utility rebate of $50,000 for energy savings payable when the building is put in service Operations and maintenance are $115,000 per year (not including energy)