A city has developed a plan to provide for futuremunicipal

Chapter , Problem 5-63

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A city has developed a plan to provide for futuremunicipal water needs. The plan proposes an aqueduct that passes through 500 feet of tunnel ina nearby mountain. Two alternatives are being con- sidered. The first proposes to build a full-capacitytunnel now for $556,000. The second proposes tobuild a half-capacity tunnel now (cost=$402,000),which should be adequate for 20 years, and thento build a second parallel half-capacity tunnel. Themaintenance cost of the tunnel lining for the full- capacity tunnel is $40,000 every 10 years, and foreach half-capacity tunnel it is $32,000 every 10years.The friction losses in the half-capacity tunnelwill be greater than if the full-capacity tunnel werebuilt. The estimated additional pumping costs inthe single half-capacity tunnel will be $2000 peryear, and for the two half-capacity tunnels it willbe $4000 per year. Based on capitalized cost anda 7% interest rate, which alternative should beselected?