A mall with two levels is under construction. The plan is to install only 9 escalators at the start, although the ultimate design calls for 16. The question arises as to whether to provide necessary facilities (stair supports, wiring conduits, motor foundations, etc.) that would permit the installation of the additional escalators at the mere cost of their purchase and installation or to defer investment in these facilities until the escalators need to be installed.
• Option 1. Provide these facilities now for all 7 future escalators at $300,000.
• Option 2. Defer the investment in the facility as needed. Install 2 more escalators in two years, 3 more in five years, and the last 2 in eight years. The installation of these facilities at the time they are required is estimated to cost $140,000 in year 2, $160,000 in year 5, and $180,000 in year 8.
Additional annual expenses are estimated at $7,000 for each escalator facility installed. Assume that these costs begin one year subsequent to the actual addition. At an interest rate of 12%, compare the net present worth of each option over eight years.