To provide drinking water as part of its 60-year plan, a west coast city is considering constructing a pipeline for importing water from a nearby community that has a plentiful supply of brackish groundwater. A full-sized pipeline can be constructed at a cost of $100 million now. Alternatively, a smaller pipeline can be constructed now for $60 million and enlarged 25 years from now for another $100 million. The pumping cost will be $20,000 per year higher for the smaller pipeline during the first 25 years but will be approximately the same thereafter. Both pipelines are expected to have the same useful life with no salvage value. At an interest rate of 10% per year compounded semiannually, which alternative is more economical?
For each of the following problems, (a) draw the cash flow diagram; (b) present clean and clear manual solutions to the problem; (c) highlight the final answer (only the final answer as required by the problem) by enclosing it within a box.
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To provide drinking water as part of its 60-year plan, a west coast city is considering constructing a pipeline for importing water from a nearby community that has a plentiful supply of brackish groundwater. A full-sized pipeline can be constructed at a cost of $100 million now. Alternatively, a smaller pipeline can be constructed now for $60 million and enlarged 25 years from now for another $100 million. The pumping cost will be $20,000 per year higher for the smaller pipeline during the first 25 years but will be approximately the same thereafter. Both pipelines are expected to have the same useful life with no salvage value. At an interest rate of 10% per year compounded semiannually, which alternative is more economical?
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