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 actually need to be installed. Additional annual expenses are estimated at $7,000 for each escalator after it's installed. Assume these costs begin one year after the installation. At an interest rate of 12%, compare the net present worth of each option over eight years. The two options are: Option A Provide these facilities now for all seven future escalators at $300,000
Option B Defer the investment as needed. Install two more escalators in two years, three more in five years, and the last two 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 $3000 for each escalator facility in- stalled. At an interest rate of 12%, compare the net present worth of each option over eight years