A contractor has a contract to construct a 12,000-ft-long tunnel in 30 months. He is trying to decide whether to do the job with his own forces or subcontract the job. He asks you to calculate the equivalent monthly cost of each alternative. His i = 1 percent per month. Production under both alternatives will be 300 ft per month.
A contractor has a contract to construct a 12,000-ft-long tunnel in 30 months. He is trying to decide whether to do the job with his own forces or subcontract the job. He asks you to calculate the equivalent monthly cost of each alternative. His i = 1 percent per month. Production under both alternatives will be 300 ft per month.
Alternative A
Buy a tunneling machine and work with contractor’s own forces.
cost of tunneling and machine = $ 2,400,000 paid now
salvage value of machine at EOM 30 = $ 540,000
cost of labor and materials = $ 250/ft for the first 10 months, increasing by 0.5%/month at EOM each month thereafter
Alternative B
Subcontract the work. Cost $500 per foot of advance of the tunnel heading, for the full 12,000 ft.
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