A city Water company is comparing 2 plans for supplying water to new subdivisions as

the city expands

Plan A: will cover requirements for the next 20 years and costs $450 000. After 20 years

a 2nd facility will have to be added at the same cost. To maintain the required level of

service yearly maintenance will have to be done at an estimated $2500, with yearly

operating costs expected at $40 000 for the first 10 years, then increasing by $1000 for

years 11-20. This cost is expected to double once the 2nd facility is built. Major

overhauls to the facilities are projected to be required every 20 years at a costs of $75

000 per facility.

Plan B: will supply all water for the area indefinitely into the future, although the facility

will operate at half capacity for the first 20 years. Annual operating costs over this period

are expected to be $35 000, then will increase to $65 000 in year 21 with yearly

maintenance being $1500. The initial cost for this plan is $600 000, with major

overhauls required every 40 years at an estimated cost of $200 000.

a) Perform a present value analysis on each of the options for a single service life cycle

if i=10%. What values do you get for each option?

b) Is this a reasonable way to compare these 2 machines? Explain your why or why not

what approach you would recommend for a better comparison,

c) The resident's will be charged based on the annual equivalent amount. What is the

annual equivalent amount for each of the plans, and which version would you

recommend to Halifax Water? Explain your reasoning

ANSWER, A,B AND C.