A bi-level mall is under construction. Installation of only nine escalators is planned at the start, although the ultimate design calls for 16. The question arises of whether to provide necessary facilities that would permit the installation of the additional escalators (e.g., stair supports, wiring conduits, and motor foundations) at the mere cost of their purchase and installation now or to defer investment in these facilities until the escalators need to be installed. The two options are detailed as follows:
Option 1: Provide these facilities now for all seven future escalators at $200,000.
Option 2: Defer the investment as needed. Installation of two more escalators is planned in two years, three more in five years, and the last two in eight years. The installation of these facilities at the time they are required is estimated to cost $100,000 in year two, $160,000 in year five, and $140,000 in year 8. Additional annual expenses are estimated at $3,000 for each escalator facility installed.
At an interest rate of 12%, compare the net present worth of each option over eight years.