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A 50-meter tunnel must be constructed for a new city aqueduct. One alternative is to build a full- capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then to build a second parallel half- capacity tunnel 20 years hence for $300,000. The cost to repair the tunnel lining every 10 years is $20,000 for the full-capacity tunnel and $16,000 for each half-capacity tunnel. Determine whether the full- capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem by the conventional benefit-cost ratio analysis, using 4% interest rate and a 50-year analysis period. There will be no tunnel lining repair at the end of the 50 years.

A 50-meter tunnel must be constructed for a new city aqueduct. One alternative is to build a full- capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then to build a second parallel half- capacity tunnel 20 years hence for $300,000. The cost to repair the tunnel lining every 10 years is $20,000 for the full-capacity tunnel and $16,000 for each half-capacity tunnel. Determine whether the full- capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem by the conventional benefit-cost ratio analysis, using 4% interest rate and a 50-year analysis period. There will be no tunnel lining repair at the end of the 50 years.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter17: Long-term Investment Analysis
Section: Chapter Questions
Problem 6E
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Based off the calculated conventional benefit-cost ratios (BCRs) for both options (the full-capacity tunnel and the 2 half-capacity tunnels please state whether the recommendation should be to build the full-capacity tunnel now or the first half-capacity tunnel. Make sure to show all mathematical work to get the 2 BCR values.
A 50-meter tunnel must be constructed for a new city aqueduct. One alternative is to build a full- capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then to build a second parallel half- capacity tunnel 20 years hence for $300,000. The cost to repair the tunnel lining every 10 years is $20,000 for the full-capacity tunnel and $16,000 for each half-capacity tunnel. Determine whether the full- capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem by the conventional benefit-cost ratio analysis, using 4% interest rate and a 50-year analysis period. There will be no tunnel lining repair at the end of the 50 years.
Transcribed Image Text:A 50-meter tunnel must be constructed for a new city aqueduct. One alternative is to build a full- capacity tunnel now for $500,000. The other alternative is to build a half-capacity tunnel now for $300,000 and then to build a second parallel half- capacity tunnel 20 years hence for $300,000. The cost to repair the tunnel lining every 10 years is $20,000 for the full-capacity tunnel and $16,000 for each half-capacity tunnel. Determine whether the full- capacity tunnel or the half-capacity tunnel should be constructed now. Solve the problem by the conventional benefit-cost ratio analysis, using 4% interest rate and a 50-year analysis period. There will be no tunnel lining repair at the end of the 50 years.
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