W16_RW_Road Type Selection using Capitalized Worth method


Disclaimer: All value in this blog is not real, it used to illustrate the Capitalized Worth method only.

Problem Statement:

The district government is facing the point to decide the type of 10KM of public road to be constructed, there are two alternatives of road type, Asphalt and Concrete based road.
The Asphalt road will require the initial investment $1,000,000 with annual maintenance cost of $20,000 and $200,000 major maintenance for every 10 years. While the concrete road will require the initial investment $2,000,000 with the annual maintenance cost of $10,000 and $300,000 for major maintenance for every 15 years.
What is the best alternative road type using the Capitalized Worth (CW Method) if the MARR = 15%?

The Feasible Alternatives:

  1. Concrete Road
  2. Asphalt Road

Tools and Techniques:

From Sullivan’s Engineering Economy 15th Edition, chapter 5, pp 187, the Capitalized-Worth Method CW(i%) = AW(1/i)
Selection Criteria:

The greater CW is the best selection.

Capitalized Calculation:

  1. Asphalt Road

The cash flow diagram

CW(asphalt) = -$1,000,000-$200,000(A/F,15%,10) / I – $20,000/i

= -$1,000,000-$200,000(0.0493) / 0.15 – $20,000/0.15

       = -$1,199,067

B.     Concrete Road

The cash flow diagram

CW(concrete) = -$2,000,000-$300,000(A/F,15%,15) / I – $10,000/i

= -$2,000,000-$300,000(0.0210) / 0.15 – $10,000/0.15

       = -$2,108,667

Because of CW(asphalt) > CW(concrete), then the best option among these alternatives is ASPHALT ROAD.

Conclusion:

The Capitalized Worth for public facility is not considering the revenue, so then the CW value will be negative number. Now the district government selection will be the Asphalt Road, with the assumption all supporting data is correct. The district government would plan to present it to the higher government level.

References:

Sullivan, W.G., Wicks, E.M., Koelling, C.P. (2009). Engineering Economy, Fifteenth edition. Pearson International Edition, 2012, Chapter 5, pages 187.

1 thought on “W16_RW_Road Type Selection using Capitalized Worth method

  1. AWESOME topic, Pak Ridwan and you did a great job on solving the problem…… BUT, why only one reference? Isn’t the whole objective here to broaden your learning? This is why in order to get 5 stars, you need to be citing a MINIMUM of three sources.

    The topic you picked is a VERY interesting and dynamic one, so given you are looking for topics, why not check out these and perhaps some additional references and see if using the CW method alone is the best or the ONLY factor:

    http://www.pwmag.com/industry-news.asp?sectionID=770&articleID=273635

    Click to access asphalt_vs_concrete.pdf

    http://www.concreteisbetter.com/vs.html

    My suggestion would be to see if there are OTHER methods to determine which is best and compare them. (The “alternatives” would be CW, IRR, NPV, ERR, ?????)

    Keep up the good work. Your last postings have been getting much better.

    BR,
    Dr. PDG, Jakarta

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