A consulting engineer has been engaged to advise a town how best to proceed with the construction of a 200,000 m3 water supply reservoir. Since only 120,000 m3 of storage will be required for the next 25 years, an alternative to building the full capacity now is to build the reservoir in two stages. Initially, the reservoir could be built with 120,000 m3 of capacity and then, 25 years hence, the additional 80,000 m3 of capacity could be added by increasing the height of the reservoir. Estimated costs are as follows:

If interest is computed at 4%, which construction plan is preferred?

Construction cost Annual Maintenance cost Build in two stages first stage: 120,000 m314,200,000 Second stage: Add 80,000 m3 of capacity, additional S12,600,000 construction and maintenance costs $75,000 S25,000 Build full capacity now 200,000 m reservoir S22,400,000 S100,000