A single undergroung transmission circuit is needed immidiately, and load studies indicated the need for a second circuit in 6 years. If provision is made for a second conduit when the conduit for the first circuit is installed , there will be no future need for reopening, trenching, backfilling, and repaving. The cost of installing a single circuit with minimum preparations for the eventual second circuit is $850,000. The installation of the second circuit will be considered to cost $800,000 at the end of year 6 in order to be in operation by the begining of year 7. If the second circuit is installed immidiately , The total cost will be $1.4 million.
Constant annual operationg and maintenance costs of the circuits are 8 percent of the first cost . The average life of a circuit is 20 years. The required rate of return on such investments is 10 percent before taxes.
a) Compare the deferred investment with the immidiate investment, using a 20-year study period.
b) Compare the two circuit plans on an infinite study period. Then compare the soulion with that in part (a). Which more reasonable? Why?