Question

1. Determine the capitalized cost of a small public market if the structure has a first cost of P20M, a life of 20 years and a salvage value of P750,000. The annual operating cost is P150,000. Taxes to be paid is P70,000 annually. Use an interest rate of 7.5%.

2. The maintenance cost of equipment is P15,000 per year and its capitalized cost at 6% interest is P1.8M. IF the equipment has a salvage value of P30,000 and has to be renewed at cost after 10 years, find its original cost.

3. A company uses a type of truck that costs P2M, with a life of three years and a final salvage value of P320,000. How much could the company afford to pay for another type of truck for the same purpose, whose life is four years with a final salvage value of P400,000, if money is worth 4%?

4. Determine the capitalized cost of a research laboratory that requires P5M for original construction; P100,000 at the end of every year for the first 6 years and then P120,000 each year thereafter for operating expenses, and P500,000 every 5 years for replacement of equipment with interest at 12% per annum?

Answer 1

The initial cost, P = P 20,000,000 (Cash Outflow),

Annual operating and maintenance cost, A = P 150,000 (Cash Outflow),

Salvage value, F = P 750,000 (Cash Inflow).

Use Full life , N = 20 years

Capitalization Cost (PW) = - 20,000,000 – 150,000(P/A, i, n) + 750,000(P/F, i, n)

PW = - 20,000,000 – 150,000(P/A, 7.5%, 20) + 750,000(P/F, 7.5%,20)

(P/A, 7.5%, 20) = 7.0556

(P/F, 7.5%,20) = 0.2354

PW = - 20,000,000 – 150,000 x 7.0556 + 750,000 x 0.2354

PW = - 20,881,787.55