Two highway capacity improvement plans have been proposed for a congested suburban arterial. Select the most cost-effective alternative using present worth analysis. Assume an interest rate of 5% per year and a design life of 20 years for each alternative. Alternative A entails improvements to traffic signals at an initial cost of $82,000 and a salvage value of $5,000. Annual maintenance costs will be $700 per year. Alternative B entails traffic signal improvements and addition of a left-turn lane at an initial cost of $72,000 and no salvage value. Annual maintenance costs will be $1,200 per year, except in year 10 in which a rehabilitation will cost $14,000.

Question

What will be an ideal response?

Answer 1

NPWA = – {82000 – 5000(P/F,5%,20) + 700(P/A,5%,20)}
NPWA = – {82000 – 5000(0.3769) + 700(1/0.0802)}
= – $88,844
NPWB = – {72000 + 1200(P/A,5%,20) + 12800(P/F,5%,10)}
NPWB = – {72000 + 1200(1/0.0802) + 12800(0.6139)}
= – $94,821
Alternative A is the most cost-effective (higher net present worth).