A city has developed a plan to provide for future municipal water needs. The plan proposes an aqueduct that passes through 500 feet of tunnel in a nearby mountain. Two alternatives are being considered. The first proposes to build a full-capacity tunnel now for $556,000. The second proposes to build a half capacity tunnel now (cost = $402,000), which should be adequate for 20 years, and then to build a second parallel half-capacity tunnel. The maintenance cost of the tunnel lining for the full-capacity tunnel is $40,000 every 10 years, and for each half-capacity tunnel it is $32.000 every 10.
The Friction losses in the half-capacity tunnels will be greater than in the full-capacity tunnel. The estimated additional pumping costs in each half-capacity tunnel will be $2000 per year. Based on capitalized cost and a 7% interest rate, which alternative should be selected?