Question

A bridge design firm is performing an economic analysis of two mutually exclusive designs for a highway overpass. The steel girder option has an initial cost of $2.04 million, and the concrete option has an initial cost of $2.5 million. Every 25 years, the steel bridge must be painted at a cost of $450,000, and all other maintenance costs are the same for both options. The steel bridge is expected to last 50 years, and concrete bridge is expected to last 75 years. Based on the shortest acceptable analysis period, determine the present worth of costs for the best option using an interest rate of 9%. Express your answer in $ to the nearest $10,000.

Answer 1

interest rate = 9%

Initial cost of concrete bridge = 2500000,

life = 75 yrs

Initial cost of steel bridge = 2040000,

life = 50 yrs

Paint job for steel bridge = 450000 after 25 yrs

Considering a study period of 50 yrs for analysis as life of steel bridge is only 50 yrs

Present worth of concrete bridge = -2,500,000

Present worth of steel bridge = -2,040,000 - 450000 * (P/F, 9%,25)

= -2,040,000 - 450000 * 0.115967836

= -2,092,185.53

we will choose steel bridge as it has lower NPV = -2,090,000 (rounding off to nearest 10000)