A County is planning to build a new roadway connector in the rapidly developing area of the county. The road can be built at a reduced capacity now for $30 million and can be widened 15 years later for an additional $20 million. An alternative is to construct the full capacity connector now for $40 million. Both alternatives would provide the needed capacity for the 25-year analysis period. Maintenance cost differences are small and may be ignored. At 6% interest, which alternative should be selected:

a. Two stage construction with a $1,700,000 savings

b. Single stage construction with a savings of $1,700,000

c. Two stage construction with a $300,000 savings

d. Single stage construction with a savings of $300,000

Solution: Analysis of the two-stage construction:

PW of cost = $30 million + $20 million (P/F, 6%, 15)

= $30 million + $8.3 million

= $38.3 million

Analysis of the single-stage construction: From the information provided:

PW of cost = $40 million

Two-stage construction alternative is preferred with a $1,700,000 savings.