Question

There are two alternatives for a water supply project in a city. The details of cash...

There are two alternatives for a water supply project in a city. The details of cash flow of the alternatives are shown below.

Alternative-1

Initial cost = BD 100,000
Annual operating cost = BD 1000
Cost of renovation = BD 1700 at the end of every 10 years
One time upgrading cost = BD 20,000 at the end of 15 year

Alternative-2

Initial cost = BD 120,000
Annual operating cost = BD 900
Cost of renovation = BD 18,000 at the end of every 16 years
Compare the alternatives on the basis of capitalized cost and find out the economical alternative if the rate of interest is 7% per year

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