The engineering department of a metropolitan city has proposed two capital projects that it feels are long overdue. The first project calls for extensive repairs of the citys storm drains, while the second for the construction of a new garage for city-owned vehicles. The engineering department argues that both projects are needed. Because of the dysfunctional state of the citys current storm-drain system, the city is incurring an annual expense of $42,000 per year in street repairs and street maintenance. At the same time, it has cost the city $45,000 in rent every year to park city vehicles in a privately-owned garage. It has been estimated that repairing the drain system would cost $170,000, while constructing a new garage would cost $250,000. Once the drain system is repaired, there is an annual cost of $20,000 to maintain. The operating cost of a garage for city-owned vehicles is about $15,000 annually. Both projects are projected to have service lives of 30 years, at the end of which they will have no salvage value. It is assumed that the current interest rate of 10% reflects societys time preference, and that it will stay at that level for the next 50 years. In the wake of a severe budget retrenchment, the Mayors office has asked the planning department to evaluate both projects. While neither project would be too expensive to undertake, the city cannot afford both in this recession. The city, then, would have to choose the project that yields the highest net benefit. Which project should the city undertake?

Use the annuity approach when calculating present values.

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