Question: The U.S. Bureau of Reclamation is considering three proposals for increasing the capacity of the main drainage canal in an agricultural region of Nebraska. Proposal A requires dredging the canal to remove sediment and weeds that have accumulated during previous years' operation.
The capacity of the canal will have to be maintained in the future near its design peak flow because of increased water demand.
The Bureau is planning to purchase the dredging equipment and accessories for $750,000. The equipment is expected to have a 10-year life with a $19,000 salvage value. The annual operating costs are estimated to total $60,000. To control weeds in the canal itself and along the banks, environmentally safe herbicides will be sprayed during the irrigation season. The yearly cost of the weed control program is expected to be $130,000.
Proposal B is to line the canal with concrete at an initial cost of $8 million. The lining is assumed to be permanent, but minor maintenance will be required every year at a cost of $6000. In addition, lining repairs will have to be made every 5 years at a cost of $40,000.
Proposal C is to construct a new pipeline along a different route. Estimates are an initial cost of $8 million, annual maintenance of $4000 for right-of-way, and a life of 50 years.
Compare the alternatives on the basis of annual worth, using an interest rate of 10% per year.