A road is being proposed to facilitate a housing development on a scenic lake. Two alternatives have been suggested. One of the roadway alignments is to go around the lake and slightly impact a wetland. The second alternative will also go around the lake and will significantly impact two wetlands. The following table shows the anticipated costs for each alternative. Assuming that the annual interest rate is 7%, determine which alternative is preferred using equivalent annual cost analysis.
What will be an ideal response?
First, calculate the EUAC of Alternative I.
EUACI = 75000(A/P, 7%, 15) + 3000 + 7500 + 1500 – 45000
(A/F, 7%, 15)
EUACI = 75000(0.1098) + 12000 – 45000(0.0398)
EUACI = $18,444
Therefore, the EUAC of Alternative I is $18,444.
Next, calculate the EUAC of Alternative II.
EUACII = 125000(A/P, 7%, 15) + 2000 + 2500 + 2500 – 25000
(A/F, 7%, 15)
EUACII = 125000(0.1098) + 7000 – 25000(0.0398)
EUACII = $19,730
Therefore, the EUAC of Alternative II is $19,730.
Alternative I is preferred since it has a lower EUAC.
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