The city of Modesto, California needs more water. The town engineer has

selected two plans for comparison: a gravity-based plan (divert water from the Sierras and

pipe it by gravity to the city) and a pumping plan (pump water from a closer water source to

the city). The pumping plant would be built in two stages, with half-capacity installed

initially and the other half installed 10 years later.

The analysis should assume a 40-year life, 10% interest on the municipal loan used to finance

the project, and no salvage value of the project or equipment and the end of its life.

Gravity Pumping

Initial investment $2.8 million $1.4 million

Additional investment in year 10 None $200,000

Operation and maintenance $10,000/yr $25,000/yr

Power cost

Average the first 10 years None $50,000/yr

Average the next 30 years None $100,000/yr

(a) Use an annual cash flow analysis to find out which plan is preferred

(b) What is the breakeven investment cost in year 10 to make these two projects

equally preferable?