Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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The state is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region. Proposal A requires dredging the canal. The state is planning to purchase the dredging equipment and accessories for $650,000. The equipment is expected to have a 10-year life with a $17,000 salvage value. The annual operating costs are estimated to total $50,000. To control weeds in the canal itself and along the banks, environmentally safe herbicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $120,000.
Proposal B is to line the canal walls with concrete at an initial cost of $4 million. The lining is assumed to be permanent, but minor maintenance will
be required every year at a cost of $5000. In addition, lining repairs will have to be made every 5 years at a cost of $30,000.
Proposal C is to construct a new pipeline along a different route. Estimates
are: an initial cost of $6 million, annual maintenance of $3000 for right-of-way, and a life of 50 years.
Compare the alternatives on the basis of annual worth, using an interest rate of 5% per year.
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