Solve using Annual Cash Flow Analysis

Question 1: A consulting engineer has been engaged to advise a town how best to proceed with the construction of a 200,000m³ water supply reservoir. Since only 120,000m³ 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 120,000m³ of capacity and then, 25 years hence, the additional 80,000m³ of capacity could be added by increasing the height of the reservoir. Estimated costs are as follows:

	Construction cost	Annual maintenance cost
Build in 2 stages: First Stage: 120,000m3 reservoir Second Stage: Add 80,000, additional construction and maintenance costs	$14,200,000 $12,600,000	$75,000 $25,000
Build full capacity now: 200,000m3 reservoir	$22,400,000	$100,000

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