Answer:
The second alternative is the better alternative. That is, it is better to build first stage only is now for $40,000,000, and the balance in 20 years time.
Explanation:
Note: See the attached excel file for the calculation of the present values of the total cash outflows of the two alternatives.
From the attached excel file, we have:
r = interest rate = 6%
Present values of the total cash outflows of the first alternative = -$122,662,039
Present values of the total cash outflows of the second alternative = -$94,492,585
Based on the above, since the present values of the total cash outflows of the second alternative of $94,492,585 is less than the present values of the total cash outflows of the first alternative of $122,662,039, the second alternative is therefore the better alternative. That is, it is better to build first stage only is now for $40,000,000, and the balance in 20 years time.
