Question

8.28 Two roadway designs are under consideration for access to a permanent suspension bridge. Design 1A will cost $3 million to build and $100,000 per year to maintain. Design 1B will cost $3.5 million to build and $40,000 per year to maintain. Both designs are assumed to be permanent. Use an AW-based rate of return equation to determine (a) the breakeven ROR, and (b) which design is preferred at a MARR of 10% per year.

Answer 1

Breakeven ROR is 12%

At MARR of 10% 1B design is preferred as it has a lower present value of cost of $3,900,000

Step-by-step explanation:

The breakeven rate of return ,is the rate of return where the present value of cost incurred under both arrangements are the same as shown below"

present of value of 1A=$3,000,000+$100,000/r

Present value of 1B=$3,500,000+$40,000/r

thereafter,at breakeven rate of return,both PVs are the same

$3,000,000+$100,000/r=$3,500,000+$40,000/r

100,000/r-40,000/r=3,500,000-3,000,000

(100,000-40,000)/r=500,000

60,000/r=500,000

r=60,000/500,000=12%

At MARR

cost 1A=$3,000,000+$100,000/10%=$4,000,000

Cost 1B=$3,500,000+$40,000/10%=$3,900,000