Question 5 Two structural designs for a large public monumen

Question 5 Two structural designs for a large public monument in Indonesia are under evaluation as shown in the table. Determine which design should be selected if the service period of the monument is indefinite and the interest rate is 2% per year. Please state clearly any assumptions. (10 marks) Alternative Initial cost, S 310,000 325,000 Annual maintenance cost, S 23.000 24.500 Useful life, years

Solution

Answer:

Alternative A:
PV = 310,000, N = 8, r = 2%, FV = 0; compute PMT =?

PV = (PMT/r)*(1 – 1/(1+r)^N)

310,000 = (PMT/0.02)*(1 – 1/1.02^8)

PMT = 42,318.04

EUAC = 42,318.04 + 23,000 = 65,318.04

If this project will not for the forever, periodic investment and annual maintenance costs will continue over in cyclic order over the estimated life.

PV of estimated cost for infinity life = EUAC/r = 65,318.04/0.02 = 3,265,902

Alternative B:

PV = 325,000, N = 11, r = 2%, FV = 0; compute PMT = 33,207.83

EUAC = 33,207.83 + 24,500 = $57,707.83

PV of estimated cost for infinity life = 57,707.83/0.02 = $2,885,392

Buy looking EUAC or their PV of costs, It can be judged that alternative B is cheaper.