You are a design engineer working for the Turnpike Authority. Your client has asked you to evaluate the economic feasibility of two alternative toll bridge designs. Both alternatives are expected to have a useful life of 25 years. Also, for both designs, it is assumed that major rehabilitation of each bridge will be required during Year 15 of the useful life. Further, inflation is expected to average about 3% annually during the project life. The Turnpike Authority would like to earn a return of 7%. Therefore, the total project discount rate is about 10%.

Alternative 1 is a lower cost option but restricts traffic across the bridge and thus does not optimize toll revenue. Alternative 1 has initial capital cost of $1,000,000 and starting at the end of Year 1 is expected to generate $125,000 in toll revenue each year until the end of its useful life. Major rehabilitation during Year 15 is expected to cost $200,000.

Alternative # 2 is more expensive but generates greater toll revenues each year. Alternative 2 has an initial capital cost $1,400,000. It is expected to generate $125,000 of revenue annually for 10 years. Starting at Year 11, it is estimated the revenues will increase to $250,000 per year and stay that way until the end of the project life. Major rehabilitation during Year 15 is expected to cost $250,000.

Answer the following questions regarding these alternatives:

4. Which alternative would you select and why ?