A supermall with two levels is under construction. The plan is to install only 9 elevators at the start, although the ultimate design calls for 16. The question arises as to whether to provide necessary facilities (supports, wiring conduits, motor foundations, etc.) that would permit the installation of the additional elevators at the mere cost of their purchase and installation or to defer investment in these facilities until the elevators actually need to be installed. Additional annual expenses are estimated at $7,000 for each elevator after it's installed. Assume these costs begin one year after the installation. At an interest rate of 12%, compare the net present worth of each option over eight years. The two options are: Option A Provide these facilities now for all seven future elevators at $300,000 Option B Defer the investment as needed. Install two more elevators 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 $140,000 in year 2, $160,000 in year 5, and $180,000 in year 8

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
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A supermall with two levels is under construction. The plan is to install only 9 elevators at the start, although the ultimate design calls for 16. The question arises as to whether to provide necessary facilities (supports, wiring conduits, motor foundations, etc.) that would permit the installation of the additional elevators at the mere cost of their purchase and installation or to defer investment in these facilities until the elevators actually need to be installed. Additional annual expenses are estimated at $7,000 for each elevator after it's installed. Assume these costs begin one year after the installation. At an interest rate of 12%, compare the net present worth of each option over eight years. The two options are:

  • Option A Provide these facilities now for all seven future elevators at $300,000
  • Option B Defer the investment as needed. Install two more elevators 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 $140,000 in year 2, $160,000 in year 5, and $180,000 in year 8
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