Question

A computer platform requires $150,000 initial investment and additional $100,000 after 10 years. The annual software maintenance costs are $6,000 for the first 4 years and $13,000 thereafter. In addition, there is expected to be a recurring major upgrade cost of 19,000 every 13 years. Assuming 5% interest rate, calculate the capitalized value of the project's costs

Answer 1

Solution :-

The capitalized value of the project's costs =

Initial Investment = $150,000

Present Value of Additional Investment = $100,000 / ( 1 + 0.05 )10

= $100,000 * 0.6139 = $61,391.33

Present Value of Annual Software Maintenance Cost =

For First 4 years = $6,000 * PVAF ( 5% , 4 ) = $6,000 * 3.546 = $21,275.70

After 4 Years = [ $13,000 / 0.05 ] * PVF ( 5% , 4 ) = $260,000 * 0.8227 = $213,902.60

Net Present Value of Annual Software Maintenance Cost = $21,275.70 + $213,902.60 = $235,178.30

Present value of Upgrade Cost = $19,000 / [ ( 1 + 0.05 )13 - 1 ]

= $19,000 / 0.88565 = $21,453.19

Now the capitalized value of the project's costs =

= $150,000 + $61,391.33 +  $235,178.30 + $21,453.19

= $468,022.90

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