The local government of a city has to build a bridge to connect the city with another big city nearby. This government has to bear all the construction and maintenance costs. There are two alternatives. The first alternative (A) requires a much larger initial investment but the maintenance and operating costs in the future will be much lower. The second alternative (B) incurs a smaller initial investment but larger cash outflows in the future. In addition, Alternative A will last twice as long as Alternative B. Both of them have no salvage value. Based on the information given in the following table assuming the amounts remain unchanged over time, i.e.the repeatability assumption applies , do the analyses specified below. [Note: To simplify the calculations, assume that the annual maintenance costs and upkeep cost will be incurred up to the last year of the service lives of both alternatives.]
a) Which alternative should the government choose if it adopts an interest rate of 5% and a study period of 100 years? Use the annual worth (AW) method to evaluate the alternatives and show your calculations clearly in the space specified below.
b) Redo the analysis in (i) using the present worth (PW) method.
c) Perform necessary calculations to verify whether your answers to (i) and (ii) are consistent with each other.
d) If the government expects the market interest rate to rise in the near future and adopts a higher interest rate than 5%, will it change the government’s choice? Explain
your answer without any calculation. .
